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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

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

 

For the quarterly period ended March 31, 2021

OR

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

 

For the transition period from _______ to _______

 

Commission file number 0-23325

gfed20210331_10qimg001.gif

Guaranty Federal Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

43-1792717

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

  

2144 E Republic Rd, Suite F200

 

Springfield, Missouri

65804

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number: 1-833-875-2492

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.10 per share

GFED

NASDAQ Global Market

 

 

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

 

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

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Outstanding as of April 30, 2021

Common Stock, Par Value $0.10 per share

4,385,031 Shares

 

 
 

 

GUARANTY FEDERAL BANCSHARES, INC.

 
 

TABLE OF CONTENTS

 

Page

PART I. FINANCIAL INFORMATION
   

Item 1. Financial Statements

  
Condensed Consolidated Financial Statements (Unaudited):  

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Income

4

Condensed Consolidated Statements of Comprehensive Income

5

Condensed Consolidated Statements of Stockholders’ Equity

6

Condensed Consolidated Statements of Cash Flows

8

Notes to Condensed Consolidated Financial Statements

9
   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

29
   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

36
   

Item 4. Controls and Procedures

37
   

PART II. OTHER INFORMATION
   

Item 1. Legal Proceedings

37
   

Item 1A. Risk factors

37
   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

38
   

Item 3. Defaults Upon Senior Securities

38
   

Item 4. Mine Safety Disclosures

38
   

Item 5. Other Information

38
   

Item 6. Exhibits

38
   

Signatures

39

 

2
 

 

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

 

GUARANTY FEDERAL BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2021 (UNAUDITED) AND DECEMBER 31, 2020

 

  

3/31/2021

  

12/31/2020

 
ASSETS        

Cash and due from banks

 $6,895,339  $6,366,370 

Interest-bearing demand deposits in other financial institutions

  213,342,950   142,056,538 

Cash and cash equivalents

  220,238,289   148,422,908 

Interest-bearing time deposits at other financial institutions

  2,455,000   4,760,089 

Available-for-sale securities

  179,334,565   164,120,869 

Stock in Federal Home Loan Bank, at cost

  4,088,700   3,896,900 

Mortgage loans held for sale

  7,990,141   11,359,174 

Loans receivable, net of allowance for loan losses of March 31, 2021 - $9,887,939 and December 31, 2020 - $9,617,024, respectively

  743,220,776   742,149,271 

Accrued interest receivable

  4,043,621   4,060,795 

Prepaid expenses and other assets

  7,851,713   7,741,903 

Goodwill

  1,434,982   1,434,982 

Core deposit intangible

  1,907,660   2,026,910 

Foreclosed assets held for sale

  745,007   546,450 

Premises and equipment, net

  17,740,621   17,898,409 

Operating lease right-of-use asset

  8,320,050   8,469,661 

Bank owned life insurance

  25,426,934   25,294,780 

Deferred and receivable income taxes

  4,237,449   4,069,838 
  $1,229,035,508  $1,146,252,939 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

LIABILITIES

        

Deposits

 $1,023,136,682  $938,672,541 

Federal Home Loan Bank advances

  66,000,000   66,000,000 

Subordinated debentures issued to Capital Trusts

  15,465,000   15,465,000 

Subordinated notes, net

  19,575,492   19,564,131 

Advances from borrowers for taxes and insurance

  331,917   218,846 

Accrued expenses and other liabilities

  6,214,491   7,870,991 

Operating lease liabilities

  8,420,949   8,560,892 

Accrued interest payable

  564,439   932,172 
   1,139,708,970   1,057,284,573 
         

COMMITMENTS AND CONTINGENCIES

  -   - 
         

STOCKHOLDERS' EQUITY

        

Capital Stock:

        

Common stock, $0.10 par value; authorized 10,000,000 shares; issued March 31, 2021 and December 31, 2020 - 6,919,503 shares

  691,950   691,950 

Additional paid-in capital

  51,141,548   51,337,219 

Retained earnings, substantially restricted

  78,634,969   77,073,707 

Accumulated other comprehensive loss

  (1,364,854)  (53,378)
   129,103,613   129,049,498 

Treasury stock, at cost; March 31, 2021 and December 31, 2020 - 2,534,472 and 2,553,851 shares, respectively

  (39,777,075)  (40,081,132)
   89,326,538   88,968,366 
  $1,229,035,508  $1,146,252,939 

 

See Notes to Consolidated Financial Statements

 

3
 

 

 

GUARANTY FEDERAL BANCSHARES, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

 

  

3/31/2021

  

3/31/2020

 
         

Interest Income

        

Loans

 $8,817,093  $9,553,381 

Investment securities

  1,024,902   884,428 

Other

  134,609   361,048 
   9,976,604   10,798,857 

Interest Expense

        

Deposits

  1,301,695   2,494,302 

FHLB advances

  310,640   273,596 

Subordinated debentures issued to Capital Trusts

  194,602   195,772 

Subordinated notes, net

  262,500   - 

Other

  1,696   122,855 
   2,071,133   3,086,525 

Net Interest Income

  7,905,471   7,712,332 

Provision for Loan Losses

  400,000   500,000 

Net Interest Income After Provision for Loan Losses

  7,505,471   7,212,332 

Noninterest Income

        

Service charges

  364,062   409,204 

Net gain on sale of investment securities

  72,213   27,899 

Gain on sale of mortgage loans held for sale

  1,071,812   543,411 

Gain on sale of Small Business Administration loans

  423,539   - 

Commercial loan referral income

  -   555,490 

Net loss on foreclosed assets

  (1,149)  (6,926)

Other income

  685,005   570,054 
   2,615,482   2,099,132 

Noninterest Expense

        

Salaries and employee benefits

  4,366,379   3,949,614 

Occupancy

  1,128,648   1,151,089 

FDIC deposit insurance premiums

  143,206   - 

Data processing

  613,536   597,614 

Advertising

  122,250   122,250 

Amortization of core deposit intangible

  119,250   119,250 

Other expense

  961,814   858,812 
   7,455,083   6,798,629 

Income Before Income Taxes

  2,665,870   2,512,835 

Provision for Income Taxes

  449,854   407,990 

Net Income Available to Common Shareholders

 $2,216,016  $2,104,845 
         

Basic Income Per Common Share

 $0.51  $0.49 

Diluted Income Per Common Share

 $0.51  $0.49 

 

See Notes to Consolidated Financial Statements

 

4
 

 

 

GUARANTY FEDERAL BANCSHARES, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

 

   

3/31/2021

    

3/31/2020

  

NET INCOME

  $ 2,216,016     $ 2,104,845  

OTHER ITEMS OF COMPREHENSIVE INCOME:

               

Change in unrealized gain (loss) on investment securities available-for-sale, before income taxes

     (3,065,386 )     1,017,554  

Change in unrealized gain (loss) on interest rate swaps, before income taxes

     1,411,973       (3,602,643 )

Less: Reclassification adjustment for realized gains on investment securities included in net income, before income taxes

     (72,213 )     (27,899 )

Total other items of comprehensive loss

     (1,725,626 )     (2,612,988 )

Income tax benefit related to other items of comprehensive income

     (414,150 )     (627,129 )

Other comprehensive loss

     (1,311,476 )     (1,985,859 )

TOTAL COMPREHENSIVE INCOME

  $ 904,540     $ 118,986  

 

See Notes to Condensed Consolidated Financial Statements

 

5
 

 

 

GUARANTY FEDERAL BANCSHARES, INC.

 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 THREE MONTHS ENDED MARCH 31, 2021 (UNAUDITED)

 

  

Common

Stock

  

Additional Paid-

In Capital

  

Treasury

Stock

  

Retained

Earnings

  

Accumulated Other

Comprehensive Loss

  

Total

 

Balance, January 1, 2021

 $691,950  $51,337,219  $(40,081,132) $77,073,707  $(53,378) $88,968,366 

Net income

  -   -   -   2,216,016   -   2,216,016 

Other comprehensive loss

  -   -   -   -   (1,311,476)  (1,311,476)

Dividends on common stock ($0.15 per share)

  -   -   -   (654,754)  -   (654,754)

Stock award plans

  -   (195,671)  304,057   -   -   108,386 

Balance, March 31, 2021

 $691,950  $51,141,548  $(39,777,075) $78,634,969  $(1,364,854) $89,326,538 

 

See Notes to Consolidated Financial Statements

 

6
 

         

GUARANTY FEDERAL BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

QUARTERLY AND TWELVE MONTHS ENDED DECEMBER 31, 2020

 

 
  

Common

Stock

  

Additional Paid-

In Capital

  

Treasury

Stock

  

Retained

Earnings

  

Accumulated Other

Comprehensive

Income (Loss)

  

Total

 

Balance, January 1, 2020

 $691,950  $51,908,867  $(40,398,650) $72,860,750  $(431,035) $84,631,882 

Net income

  -   -   -   2,104,845   -   2,104,845 

Other comprehensive loss

  -   -   -   -   (1,985,859)  (1,985,859)

Dividends on common stock ($0.15 per share)

  -   -   -   (654,735)  -   (654,735)

Treasury stock purchased

  -   -   (390,268)  -   -   (390,268)

Stock award plans

  -   (636,438)  693,787   -   -   57,349 

Balance, March 31, 2020

  691,950   51,272,429   (40,095,131)  74,310,860   (2,416,894)  83,763,214 

Net income

  -   -   -   1,883,383   -   1,883,383 

Other comprehensive income

  -   -   -   -   846,436   846,436 

Dividends on common stock ($0.15 per share)

  -   -   -   (655,127)  -   (655,127)

Stock award plans

  -   (83,844)  26,343   -   -   (57,501)

Balance, June 30, 2020

  691,950   51,188,585   (40,068,788)  75,539,116   (1,570,458)  85,780,405 

Net income

  -   -   -   1,897,776   -   1,897,776 

Other comprehensive income

  -   -   -   -   701,706   701,706 

Dividends on common stock ($0.15 per share)

  -   -   -   (654,547)  -   (654,547)

Stock award plans

  -   117,252   (35,879)  -   -   81,373 

Balance, September 30, 2020

  691,950   51,305,837   (40,104,667)  76,782,345   (868,752)  87,806,713 

Net income

  -   -   -   946,210   -   946,210 

Other comprehensive income

  -   -   -   -   815,374   815,374 

Dividends on common stock ($0.15 per share)

  -   -   -   (654,848)  -   (654,848)

Stock award plans

  -   31,382   23,535   -   -   54,917 

Balance, December 31, 2020

 $691,950  $51,337,219  $(40,081,132) $77,073,707  $(53,378) $88,968,366 

 

See Notes to Consolidated Financial Statements

 

7
 

 

 

GUARANTY FEDERAL BANCSHARES, INC.

  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

 

  

3/31/2021

  

3/31/2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

        

Net income

 $2,216,016  $2,104,845 

Items not requiring (providing) cash:

        

Deferred income taxes

  444,597   (122,539)

Depreciation and amortization

  487,761   507,396 

Provision for loan losses

  400,000   500,000 

Gain on sale of Small Business Administration loans

  (423,539)  - 

Gain on sale of mortgage loans held for sale and investment securities

  (1,144,025)  (571,310)

Loss on sale of foreclosed assets

  -   84,106 

Amortization of deferred income, premiums and discounts, net

  1,487,090   213,234 

Amortization of intangible assets

  119,250   119,250 

Amortization of subordinated notes issuance cost

  11,361   - 

Stock award plan expense

  108,386   57,349 

Accretion of purchase accounting adjustments

  (61,021)  (209,557)

Origination of loans held for sale

  (38,178,343)  (18,621,836)

Proceeds from sale of loans held for sale

  42,619,188   19,970,915 

Increase in cash surrender value of bank owned life insurance

  (132,154)  (150,754)

Changes in:

        

Accrued interest receivable

  17,174   (21,981)

Prepaid expenses and other assets

  (138,109)  166,840 

Accounts payable and accrued expenses

  (583,868)  (454,273)

Income taxes receivable/payable

  (198,058)  295,870 

Net cash provided by operating activities

  7,051,706   3,867,555 

CASH FLOWS FROM INVESTING ACTIVITIES

        

Net change in loans

  (5,522,960)  (857,319)

Proceeds from sale of loans

  3,002,367   - 

Principal payments on available-for-sale securities

  7,392,729   4,050,696 

Proceeds from maturities of available-for-sale securities

  155,096   1,450,000 

Purchase of premises and equipment

  (320,305)  (131,773)

Purchase of available-for-sale securities

  (30,918,248)  (35,896,426)

Proceeds from sale of available-for-sale securities

  4,965,989   6,263,367 

Proceeds from maturities of interest-bearing deposits

  2,305,000   - 

Redemption (purchase) of FHLB stock

  (191,800)  545,400 

Capitalized costs on foreclosed assets held for sale

  (26,557)  - 

Proceeds from sale of foreclosed assets held for sale

  -   162,793 

Net cash used in investing activities

  (19,158,689)  (24,413,262)

CASH FLOWS FROM FINANCING ACTIVITIES

        

Net increase in demand deposits, NOW accounts and savings accounts

  98,753,934   38,327,551 

Net decrease in certificates of deposit

  (14,289,793)  (10,198,142)

Proceeds from FHLB advances

  50,000,000   10,000,000 

Repayments of FHLB advances

  (50,000,000)  (25,000,000)

Proceeds from issuance of notes payable

  -   1,000,000 

Repayments of notes payable

  -   (1,000,000)

Advances from borrowers for taxes and insurance

  113,071   129,206 

Cash dividends paid

  (654,848)  (650,619)

Treasury stock purchased

  -   (390,268)

Net cash provided by financing activities

  83,922,364   12,217,728 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  71,815,381   (8,327,979)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

  148,422,908   92,671,909 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 $220,238,289  $84,343,930 

 

See Notes to Consolidated Financial Statements

 

8
 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1:

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Guaranty Federal Bancshares, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”). The results of operations for the periods are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet of the Company as of December 31, 2020, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed or omitted.

 

 

Note 2:

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Guaranty Bank (the “Bank”). All significant intercompany transactions and balances have been eliminated in consolidation.

 

 

Note 3:

Securities

 

The amortized cost and approximate fair values of securities classified as available-for-sale were as follows:

 

  

Amortized Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

(Losses)

  

Approximate

Fair Value

 

As of March 31, 2021

                

Debt Securities:

                

U. S. government agencies

 $7,277,937  $-  $(293,249) $6,984,688 

Municipals

  66,051,714   2,157,557   (743,209)  67,466,062 

Corporates

  34,682,597   345,845   (394,092)  34,634,350 

Mortgage-backed securities - private label - commercial

  6,406,588   76,714   (8,576)  6,474,726 

Mortgage-backed securities - private label - consumer

  9,418,436   208,602   (95,228)  9,531,810 

Government sponsored asset-backed securities and SBA loan pools

  53,763,840   1,054,204   (575,115)  54,242,929 
  $177,601,112  $3,842,922  $(2,109,469) $179,334,565 

 

  

Amortized Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

(Losses)

  

Approximate

Fair Value

 

As of December 31, 2020

                

Debt Securities:

                

U. S. government agencies

 $6,282,000  $6,519  $(4,885) $6,283,634 

Municipals

  58,754,912   3,241,133   (26,991)  61,969,054 

Corporates

  30,510,893   261,740   (171,811)  30,600,822 

Mortgage-backed securities - private label - commercial

  5,399,385   55,712   (10,650)  5,444,447 

Mortgage-backed securities - private label - consumer

  9,249,375   228,469   (25,747)  9,452,097 

Government sponsored asset-backed securities and SBA loan pools

  49,053,252   1,391,728   (74,165)  50,370,815 
  $159,249,817  $5,185,301  $(314,249) $164,120,869 

 

9
 

 

Maturities of available-for-sale debt securities as of March 31, 2021:

 

  

Amortized Cost

  

Approximate

Fair Value

 

1-5 years

 $1,000,000  $999,531 

6-10 years

  39,772,344   39,833,474 

After 10 years

  67,239,904   68,252,095 

Mortgage-backed securities - private label - commercial not due on a single maturity date

  6,406,588   6,474,726 

Mortgage-backed securities - private label - consumer not due on a single maturity date

  9,418,436   9,531,810 

Government sponsored asset-backed securities and SBA loan pools not due on a single maturity date

  53,763,840   54,242,929 
  $177,601,112  $179,334,565 

 

The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $16,128,452 and $8,294,321 as of March 31, 2021 and December 31, 2020, respectively. The approximate fair value of pledged securities amounted to $16,624,795 and $8,749,409 as of March 31, 2021 and December 31, 2020, respectively.

 

Realized gains and losses are recorded as net securities gains. Gains and losses on sales of securities are determined on the specific identification method. Gross gains of $89,055 and $58,587 and gross losses of $16,842 and $30,688 for the three months ended March 31, 2021 and March 31, 2020, respectively, were realized from the sale of available-for-sale securities. The tax effect of these net gains and losses was $15,165 and $5,859 for the three months ended March 31, 2021 and March 31, 2020, respectively.

 

The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. Certain investment securities are valued at less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. It is management’s intent to hold the debt securities to maturity or until recovery of the unrealized loss. Should the impairment of any of these debt securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified, to the extent the loss is related to credit issues, and to other comprehensive income to the extent the decline on debt securities is related to other factors and the Company does not intend to sell the security prior to recovery of the unrealized loss.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2021 and December 31, 2020, was $68,784,026 and $30,049,473 respectively, which is approximately 38% and 18% of the Company’s investment portfolio.

 

10
 

 

The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2021 and December 31, 2020.

 

As of March 31, 2021

 

Less than 12 Months

  

12 Months or More

  

Total

 

Description of Securities

 

Fair Value

  

Unrealized

Losses

  

Fair Value

  

Unrealized

Losses

  

Fair Value

  

Unrealized

Losses

 
                         

U.S. government agencies

 $6,984,688  $(293,249) $-  $-  $6,984,688  $(293,249)

Municipals

  19,726,646   (665,287)  940,820   (77,922)  20,667,466   (743,209)

Corporates

  15,201,566   (390,164)  1,002,423   (3,928)  16,203,989   (394,092)

Mortgage-backed securities - private label - commercial

  1,007,242   (109)  1,484,550   (8,467)  2,491,792   (8,576)

Mortgage-backed securities - private label - consumer

  3,092,306   (95,228)  -   -   3,092,306   (95,228)

Government sponsored mortgage-backed securities and SBA loan pools

  19,343,785   (575,115)  -   -   19,343,785   (575,115)
  $65,356,233  $(2,019,152) $3,427,793  $(90,317) $68,784,026  $(2,109,469)

 

As of December 31, 2020

 

Less than 12 Months

  

12 Months or More

  

Total

 

Description of Securities

 

Fair Value

  

Unrealized

Losses

  

Fair Value

  

Unrealized

Losses

  

Fair Value

  

Unrealized

Losses

 
                         

U.S. government agencies

 $1,495,116  $(4,885) $-  $-  $1,495,116  $(4,885)

Municipals

  4,011,492   (26,991)  -   -   4,011,492   (26,991)

Corporates

  14,869,853   (171,811)  -   -   14,869,853   (171,811)

Mortgage-backed securities - private label - commercial

  1,481,805   (10,650)  -   -   1,481,805   (10,650)

Mortgage-backed securities - private label - consumer

  2,391,511   (25,747)  -   -   2,391,511   (25,747)

Government sponsored mortgage-backed securities and SBA loan pools

  5,799,696   (74,165)  -   -   5,799,696   (74,165)
  $30,049,473  $(314,249) $-  $-  $30,049,473  $(314,249)

 

 

Note 4:

Loans and Allowance for Loan Losses

 

Categories of loans at March 31, 2021 and December 31, 2020 include:

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Real estate - residential mortgage:

        

One to four family units

 $114,706,270  $115,799,200 

Multi-family

  88,353,385   90,028,775 

Real estate - construction

  85,711,951   70,847,330 

Real estate - commercial

  308,660,565   305,673,212 

Commercial loans

  133,076,722   144,326,350 

Consumer and other loans

  24,643,935   26,733,546 

Total loans

  755,152,828   753,408,413 

Less:

        

Allowance for loan losses

  (9,887,939)  (9,617,024)

Deferred loan fees/costs, net

  (2,044,113)  (1,642,118)

Net loans

 $743,220,776  $742,149,271 

 

11
 

 

Classes of loans by aging at March 31, 2021 and December 31, 2020 were as follows:

 

As of March 31, 2021

                            
  

30-59 Days
Past Due

  

60-89 Days
Past Due

  

Greater Than
90 Days

  

Total Past
Due

  

Current

  

Total Loans
Receivable

  

Total Loans >
90 Days and
Accruing

 
  

(In Thousands)

 

Real estate - residential mortgage:

                         

One to four family units

 $529  $237  $2,239  $3,005  $111,701  $114,706  $- 

Multi-family

  -   -   -   -   88,353   88,353   - 

Real estate - construction

  133   -   5,109   5,242   80,470   85,712   - 

Real estate - commercial

  17   -   501   518   308,143   308,661   - 

Commercial loans

  55   -   4,784   4,839   128,238   133,077   - 

Consumer and other loans

  32   124   20   176   24,468   24,644   - 

Total

 $766  $361  $12,653  $13,780  $741,373  $755,153  $- 

 

As of December 31, 2020

                            
  

30-59 Days
Past Due

  

60-89 Days
Past Due

  

Greater Than
90 Days

  

Total Past
Due

  

Current

  

Total Loans
Receivable

  

Total Loans >
90 Days and
Accruing

 
  

(In Thousands)

 

Real estate - residential mortgage:

                         

One to four family units

 $623  $1,058  $1,071  $2,752  $113,047  $115,799  $- 

Multi-family

  -   -   -   -   90,029   90,029   - 

Real estate - construction

  1,239   -   4,189   5,428   65,419   70,847   - 

Real estate - commercial

  264   76   161   501   305,172   305,673   - 

Commercial loans

  6   1   4,784   4,791   139,535   144,326   - 

Consumer and other loans

  10   1   21   32   26,702   26,734   - 

Total

 $2,142  $1,136  $10,226  $13,504  $739,904  $753,408  $- 

 

Non-accruing loans are summarized as follows:

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Real estate - residential mortgage:

        

One to four family units

 $2,620,669  $3,086,159 

Multi-family

  -   - 

Real estate - construction

  5,948,672   6,239,326 

Real estate - commercial

  3,849,156   3,932,241 

Commercial loans

  5,236,161   5,249,782 

Consumer and other loans

  125,090   121,090 

Total

 $17,779,748  $18,628,598 

 

12
 

 

 

The following tables present the activity in the allowance for loan losses based on portfolio segment for the three months ended March 31, 2021 and 2020:

 

Three months ended    Commercial  One to four        Consumer       

March 31, 2021

 

Construction

  

Real Estate

  

family

  

Multi-family

  

Commercial

  

and Other

  

Unallocated

  

Total

 
  (In Thousands)  

Allowance for loan losses:

 

 

 

Balance, beginning of period

 $1,132  $3,624  $1,445  $1,058  $1,129  $571  $658  $9,617 

Provision charged to expense

  363   206   (23)  (60)  122   (158)  (50) $400 

Losses charged off

  (121)  -   -   -   -   (37)  -  $(158)

Recoveries

  -   1   4   -   6   18   -  $29 

Balance, end of period

 $1,374  $3,831  $1,426  $998  $1,257  $394  $608  $9,888 

 

Three months ended    Commercial  One to four        Consumer       

March 31, 2020

 

Construction

  

Real Estate

  

family

  

Multi-family

  

Commercial

  

and Other

  

Unallocated

  

Total

 
  (In Thousands)  

Allowance for loan losses:

 

 

 

Balance, beginning of period

 $1,749  $2,267  $1,001  $746  $1,129  $443  $273  $7,608 

Provision charged to expense

  (120)  304   152   9   237   55   (137) $500 

Losses charged off

  -   -   -   -   (32)  (62)  -  $(94)

Recoveries

  -   6   1   -   15   13   -  $35 

Balance, end of period

 $1,629  $2,577  $1,154  $755  $1,349  $449  $136  $8,049 

 

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2021 and December 31, 2020:

 

As of March 31, 2021

 

Construction

  

Commercial
Real Estate

  

One to four family

  

Multi-family

  

Commercial

  

Consumer
and Other

  

Unallocated

  

Total

 
  (In Thousands) 

Allowance for loan losses:

 

 

 

Ending balance: individually evaluated for impairment

 $109  $107  $64  $-  $61  $13  $-  $354 

Ending balance: collectively evaluated for impairment

 $1,265  $3,724  $1,362  $998  $1,196  $381  $608  $9,534 

Ending balance: loans acquired with deteriorated credit quality

 $-  $-  $-  $-  $-  $-  $-  $- 

Loans:

                                

Ending balance: individually evaluated for impairment

 $5,948  $1,797  $2,621  $-  $5,105  $191  $-  $15,662 

Ending balance: collectively evaluated for impairment

 $79,764  $304,530  $112,085  $88,353  $127,850  $24,453  $-  $737,035 

Ending balance: loans acquired with deteriorated credit quality

 $-  $2,334  $-  $-  $122  $-  $-  $2,456 

 

13
 
  

As of December 31, 2020

 

Construction

  

Commercial
Real Estate

  

One to four

family

  

Multi-family

  

Commercial

  

Consumer
and Other

  

Unallocated

  

Total

 
  (In Thousands) 

Allowance for loan losses:

 

 

 

Ending balance: individually evaluated for impairment

 $114  $117  $112  $-  $62  $15  $-  $420 

Ending balance: collectively evaluated for impairment

 $1,018  $3,507  $1,333  $1,058  $1,066  $556  $658  $9,196 

Ending balance: loans acquired with deteriorated credit quality

 $-  $-  $-  $-  $1  $-  $-  $1 

Loans:

                                

Ending balance: individually evaluated for impairment

 $6,239  $1,810  $3,110  $-  $5,111  $202  $-  $16,472 

Ending balance: collectively evaluated for impairment

 $64,608  $301,453  $112,689  $90,029  $139,083  $26,532  $-  $734,394 

Ending balance: loans acquired with deteriorated credit quality

 $-  $2,410  $-  $-  $132  $-  $-  $2,542 

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

 

Included in the Company’s loan portfolio are certain loans acquired in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s current credit quality to prior periods. The ratios particularly affected by accounting under ASC 310-30 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and performing assets, and nonaccrual loans and nonperforming loans as a percentage of total loans.

 

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

14
 

 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

 

The following table summarizes the recorded investment in impaired loans at March 31, 2021 and December 31, 2020:

 

  

March 31, 2021

  

December 31, 2020

 
  

Recorded
Balance

  

Unpaid
Principal
Balance

  

Specific
Allowance

  

Recorded
Balance

  

Unpaid
Principal
Balance

  

Specific
Allowance

 
  

(In Thousands)

 

Loans without a specific valuation allowance

                     

Real estate - residential mortgage:

                        

One to four family units

 $2,457  $2,457  $-  $2,780  $2,780  $- 

Multi-family

  -   -   -   -   -   - 

Real estate - construction

  5,081   5,081   -   5,081   5,081   - 

Real estate - commercial

  3,340   3,340   -   3,419   3,419   - 

Commercial loans

  4,905   4,905   -   4,902   4,902   - 

Consumer and other loans

  117   117   -   100   100   - 

Loans with a specific valuation allowance

                     

Real estate - residential mortgage:

                        

One to four family units

 $164  $164  $64  $330  $330  $112 

Multi-family

  -   -   -   -   -   - 

Real estate - construction

  867   2,838   109   1,158   3,129   114 

Real estate - commercial

  791   791   107   801   801   117 

Commercial loans

  322   322   61   341   341   63 

Consumer and other loans

  74   74   13   102   102   15 

Total

                        

Real estate - residential mortgage:

                        

One to four family units

 $2,621  $2,621  $64  $3,110  $3,110  $112 

Multi-family

  -   -   -   -   -   - 

Real estate - construction

  5,948   7,919   109   6,239   8,210   114 

Real estate - commercial

  4,131   4,131   107   4,220   4,220   117 

Commercial loans

  5,227   5,227   61   5,243   5,243   63 

Consumer and other loans

  191   191   13   202   202   15 

Total

 $18,118  $20,089  $354  $19,014  $20,985  $421 

 

15
 

 

The following table summarizes average impaired loans and related interest recognized on impaired loans for the three months ended March 31, 2021 and 2020:

 

  

For the Three Months Ended

  

For the Three Months Ended

 
  

March 31, 2021

  

March 31, 2020

 
  

Average
Investment
in Impaired
Loans

  

Interest
Income
Recognized

  

Average
Investment
in Impaired
Loans

  

Interest
Income
Recognized

 
  

(In Thousands)

 

Loans without a specific valuation allowance

             

Real estate - residential mortgage:

                

One to four family units

 $2,680  $-  $1,091  $- 

Multi-family

  -   -   -   - 

Real estate - construction

  5,081   -   -   - 

Real estate - commercial

  3,391   2   2,765   - 

Commercial loans

  4,904   -   19   - 

Consumer and other loans

  105   3   99   2 

Loans with a specific valuation allowance

             

Real estate - residential mortgage:

                

One to four family units

 $221  $-  $1,173  $- 

Multi-family

  -   -   -   - 

Real estate - construction

  965   -   3,939   - 

Real estate - commercial

  795   -   281   - 

Commercial loans

  328   -   904   - 

Consumer and other loans

  106   -   169   - 

Total

                

Real estate - residential mortgage:

                

One to four family units

 $2,901  $-  $2,264  $- 

Multi-family

  -   -   -   - 

Real estate - construction

  6,046   -   3,939   - 

Real estate - commercial

  4,186   2   3,046   - 

Commercial loans

  5,232   -   923   - 

Consumer and other loans

  211   3   268   2 

Total

 $18,576  $5  $10,440  $2 

 

At March 31, 2021, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (“TDR”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

 

In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.

 

The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction on the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.

 

16
 

 

In March 2020, our regulators issued a statement titled “Interagency Statement on Loan Modifications and Reporting for Financial institutions with Customers Affected by the Coronavirus” that encouraged financial institutions to work prudently with borrowers who were expected to have difficulty in meeting payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further clarifies that qualified loan modifications are exempt by law from being classified as a TDR as defined by GAAP from March 1, 2020 until December 31, 2020. In December 2020, the Economic Aid to Hard Hit Small Businesses, Non-Profits and Ventures Act was enacted, which extended the CARES Act provisions until January 1, 2022. The Bank continues to work with impacted entities in the form of modifications, payment deferrals, extensions of repayment terms and/or other delays in payments, as necessary.

 

Due to the before mentioned regulatory changes, there were no troubled debt restructuring charge offs or increases to the allowance for loan losses related to TDRs during 2021 or 2020.

 

The following table presents the carrying balance of TDRs as of March 31, 2021 and December 31, 2020:

 

  

March 31, 2021

  

December 31, 2020

 

Real estate - residential mortgage:

        

One to four family units

 $1,178,475  $1,178,876 

Multi-family

  -   - 

Real estate - construction

  3,728,165   3,700,084 

Real estate - commercial

  892,242   893,992 

Commercial loans

  363,539   368,310 

Total

 $6,162,421  $6,141,262 

 

The Bank has allocated $168,881 and $142,393 of specific reserves to customers whose loan terms have been modified as a TDR as of March 31, 2021 and December 31, 2020, respectively.

 

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:

 

Pass: This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.

 

Special mention: This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

 

Substandard: This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

 

Doubtful: This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

17
 

 

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

 

Real estate-Residential 1-4 family: The residential 1-4 family real estate loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

Real estate-Multi-Family: Loans secured by multi-family residential real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

 

Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

 

Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

 

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

 

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

 

18
 

 

The following tables provide information about the credit quality of the loan portfolio using the Bank’s internal rating system as of March 31, 2021 and December 31, 2020:

 

March 31, 2021

 

Construction

  

Commercial
Real Estate

  

One to four

family

  

Multi-family

  

Commercial

  

Consumer
and Other

  

Total

 
  

(In Thousands)

 

Rating:

                            

Pass

 $79,581  $264,614  $110,881  $86,924  $120,230  $24,453  $686,683 

Special Mention

  -   4,490   729   1,429   5,012   -   11,660 

Substandard

  6,131   39,557   3,096   -   7,835   191   56,810 

Doubtful

  -   -   -   -   -   -   - 

Total

 $85,712  $308,661  $114,706  $88,353  $133,077  $24,644  $755,153 

 

December 31, 2020

 

Construction

  

Commercial
Real Estate

  

One to four

family

  

Multi-family

  

Commercial

  

Consumer
and Other

  

Total

 
  

(In Thousands)

 

Rating:

                            

Pass

 $64,531  $262,771  $110,615  $90,029  $130,874  $26,532  $685,352 

Special Mention

  -   4,442   -   -   123   -   4,565 

Substandard

  6,316   38,460   5,184   -   13,329   202   63,491 

Doubtful

  -   -   -   -   -   -   - 

Total

 $70,847  $305,673  $115,799  $90,029  $144,326  $26,734  $753,408 

 

The above amounts include purchased credit impaired loans. At March 31, 2021, purchased credit impaired loans comprised of $2.5 million were rated “Substandard”.

 

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.

 

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Commercial Loan Referral Income: In certain circumstances, the Company enters into variable-rate loan agreements (Assumable Rate Conversion “ARC” Master Servicing Agreements) with commercial loan customers, and the customer simultaneously enters into an interest swap agreement directly with a third-party (the “counterparty”).  This allows the loan customer to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement.  The Company is required to enter into a transaction agreement as part of each loan.  The agreement results in the assumption of credit and market risk equivalent by the Bank.  The agreement states that in an event of default by the loan customer, the Bank must pay a termination amount to the extent it is positive.  The termination value is defined by the Master Agreement, which is in essence the fair value of the derivative on the event date. The counterparty pays a fee to the Company for brokering the transaction and for servicing the loan/swap agreement between the customer and the counterparty.  Fee income related to these agreements was $0 and $555,490 for the three months ended March 31, 2021 and 2020, respectively.

 

19
 

 
 

Note 5: Intangible Assets

 

The Company recorded $1.4 million of goodwill as a result of its 2018 Hometown acquisition. Goodwill is tested annually, or more often if circumstances warrant, for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Goodwill impairment was neither indicated nor recorded during the three months ended March 31, 2021. Goodwill amounts are not deductible for tax purposes.

 

Additionally, as part of the Hometown acquisition, core deposit premiums of $3.5 million were recorded. Core deposit premiums are amortized over a seven year period and are periodically evaluated, at least annually, as to the recoverability of their carrying value.

 

The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) at March 31, 2021 and December 31, 2020 were as follows:

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 
  

(in Thousands)

  

(in Thousands)

 

Goodwill

 $1,435  $1,435 

Core deposit intangible

        

Gross carrying amount

  3,520   3,520 

Accumulated amortization

  (1,612)  (1,493)

Core deposit intangible, net

  1,908   2,027 

Remaining balance

 $3,343  $3,462 

 

The Company’s estimated remaining amortization expense on intangibles as of March 31, 2021 is as follows:

 

 

Amortization Expense

 
 

(in Thousands)

 
      

Remainder of:

2021

 $358 
 

2022

  477 
 

2023

  477 
 

2024

  477 
 

2025

  119 
 

Thereafter

  - 
 

Total

 $1,908 

 
 

Note 6: Leases

 

As of March 31, 2021, the Company has recorded operating Right of Use (“ROU”) assets of $8,320,050 and corresponding operating ROU liabilities of $8,420,949. At December 31, 2020, operating ROU assets were $8,469,661 with corresponding liabilities of $8,560,892. Additionally, as of March 31, 2021, the Company had financing ROU assets and liabilities of $538,825 compared to balances of $510,526 as of December 31, 2020. We maintain operating leases on land and buildings for certain branch facilities and our headquarters. Financing leases are primarily for equipment used at banking facilities. Most leases include options to renew, with renewal terms extending between one to twenty years. The exercise of renewal options is based on judgement of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether or not the renewal option is reasonably certain to be exercised include, but are not limited to, the value of the leasehold improvements, the value of the renewal rate compared to market rates and the presence of factors that would cause significant economic penalty to the Company if the option is not exercised.

 

20
 

 

Expenses for finance leases are included in other interest expense and occupancy expense line items, whereas operating leases are expensed entirely in the occupancy expense line item. Leases with a term of less than twelve months are not recorded on the balance sheet and are expensed on a straight-line basis over the lease term. Discount rates used for the purpose of valuing the leases were based on rates available to the Company on fixed rate borrowings for similar lease terms.

 

The components of lease expense and their impact on the statement of income for the three months ended March 31, 2021 and 2020 are as follows:

 

  

Three months ended

 
  

March 31,

  

March 31,

 
  

2021

  

2020

 
  

(In Thousands)

 

Finance lease cost:

        

Amortization of right-of-use assets

 $44,657  $30,977 

Interest on lease liabilities

  1,696   2,096 

Operating lease cost

  272,545   272,335 

Sublease income

  (6,300)  (12,300)
         

Total lease costs

 $312,598  $293,108 
         

Additional lease information:

        
Weighted-average remaining lease term - financing leases (in years)  3.4   3.3 
Weighted-average remaining lease term - operating leases (in years)  14.2   14.9 

Weighted-average discount rate - financing leases

  1.20%  1.96%

Weighted-average discount rate - operating leases

  5.70%  5.62%

 

The following table sets forth, as of March 31, 2021, the future minimum lease cash payments and a reconciliation of the undiscounted cash flows to the lease liability:

 

   

Financing

  

Operating

  

Total

 
       

(In Thousands)

     

Remainder of:

2021

 $143  $759  $902 
 

2022

  184   1,011   1,195 
 

2023

  111   1,014   1,125 
 

2024

  68   856   924 
 

2025

  40   752   792 
 

Thereafter

  1   8,228   8,229 
 

Total undiscounted future minimum lease cash payments

 $547  $12,620  $13,167 
 

Present value discount

  (8)  (4,199)  (4,207)
 

Lease liability

 $539  $8,421  $8,960 

 

 

Note 7: Subordinated Debentures Issued to Capital Trusts

 

During 2005, the Company formed two wholly owned grantor trust subsidiaries, Guaranty Statutory Trust I and Guaranty Statutory Trust II, to issue preferred securities representing undivided beneficial interests in the assets of the trusts and to invest the gross proceeds of the preferred securities in notes of the Company. Trust I issued $5,000,000 of preferred securities and Trust II issued $10,000,000 of preferred securities. The sole assets of Trust I were originally $5,155,000 aggregate principal amount of the Company’s fixed rate subordinated debenture notes due 2036, which were redeemable beginning in 2011. The sole assets of Trust II were originally $10,310,000 aggregate principal amount of the Company’s fixed/variable rate subordinated debenture notes due 2036, which were redeemable beginning in 2011. Trust II subordinated debenture notes bear interest at a fixed rate for five years and thereafter at a floating rate based on LIBOR. The preferred securities qualify as either Tier I or Tier II capital for regulatory purposes, subject to certain limitations. See Note 14: “Subsequent Events” for additional information regarding the full redemption of the $5,155,000 Trust I assets which will occur in May 2021.

 

21
 

 
 

Note 8: Subordinated Notes

 

On July 29, 2020, the Company completed a private offering of $20.0 million aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due 2030 (the “Notes”). The Notes were issued by the Company to the purchasers at a price equal to 100% of their face amount. Costs related to the issuance of $454,445 reduced the proceeds received by the Company and will be amortized over the life of the notes. The Notes are intended to qualify as Tier 2 capital for regulatory purposes. The Notes have a stated maturity of September 30, 2030, are redeemable by the Company at its option, in whole or in part, on or after September 30, 2025, and at any time upon the occurrences of certain events. Prior to September 30, 2025, the Company may redeem the Notes, in whole but not in part, only under certain limited circumstances set forth in the Note. On or after September 30, 2025, the Company may redeem the Notes, in whole or in part, at its option, on any interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the Notes being redeemed, together with any accrued and unpaid interest on the Notes being redeemed to but excluding the date of redemption. The Notes are not subject to redemption at the option of the holder. The Notes will bear interest at a fixed rate of 5.25% per year until September 30, 2025 or earlier redemption date. After  October 1, 2025, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR plus 519 basis points. Principal and interest on the Notes are subject to acceleration only in limited circumstances. The Notes are unsecured, subordinated obligations of the Company, are not obligations of, and are not guaranteed by, any subsidiary of the Company, and rank junior in right of payment to the Company’s current and future senior indebtedness.

 

 

Note 9: Benefit Plans

 

The Company has stock-based employee compensation plans, which are described in the Company’s 2020 Annual Report. The following tables below summarize transactions under the Company’s equity plans for the three months ended March 31, 2021:

 

Restricted Stock

 

Number of

Shares

  

Weighted

Average Grant-

Date Fair Value

 
         

Balance of shares non-vested as of January 1, 2021

  28,037  $21.80 

Granted

  20,126   18.35 

Vested

  (9,599)  22.20 

Forfeited

  -   - 

Balance of shares non-vested as of March 31, 2021

  38,564  $19.90 

 

In February 2021, the Company granted 6,979 shares of restricted stock to directors pursuant to the 2015 Equity Plan that have a cliff vesting at the end of one year and thus, expensed over that same period. These shares had a grant date market price of $18.79 per share. The total amount of expense for restricted stock grants to directors (including all previous year’s grants) during the three months March 31, 2021 and 2020 was $33,000 and $36,869, respectively.

 

22
 

 

For the three months ended March 31, 2021 and 2020, the Company granted 13,147 and 8,787 shares, respectively, of restricted stock to officers that have a cliff vesting at the end of three years. The expense is being recognized over the applicable vesting period. The total amount of expense for restricted stock grants to officers (including all previous year’s grants) during the three months ended March 31, 2021 and 2020 was $75,904 and $47,471, respectively.

 

Performance Stock Units

 

Performance

Stock Units

  

Weighted

Average Grant

Date Fair Value

 
         

Balance of shares non-vested as of January 1, 2021

  53,075  $15.40 

Granted

  -   - 

Vested

  -   - 

Forfeited

  -   - 

Balance of shares non-vested as of March 31, 2021

  53,075  $15.40 

 

During 2020, the Company has granted restricted stock units representing 53,075 hypothetical shares of common stock to officers. There are three possible levels of incentive awards: threshold (25%); target (50%); and maximum (100%). The restricted stock units vest based on two financial performance factors over the period from grant date to December 31, 2022 (the “Performance Period”). The two performance measurements of the Company (and the weight given to each measurement) applicable to each award level are as follows: (i) Earnings Per Share (50%) and (ii) Return on Average Assets (50%). In determining compensation expense, the fair value of the restricted stock unit awards was determined based on the closing price of the Company’s common stock on the date of grant, which averaged $15.40 per share. The expense is being recognized over the applicable vesting period. Due to the fact that the measurements cannot be determined at the time of the grant, the Company currently estimates that the most likely outcome is the achievement between the threshold and target levels. If during the Performance Period, additional information becomes available to lead the Company to believe a different level will be achieved for the Performance Period, the Company will reassess the number of units that will vest for the grant and adjust its compensation expense accordingly on a prospective basis. The total amount of expense for restricted stock units during the three months ended March 31, 2021 and 2020 was $12,573 and $0, respectively. The 2020 year-to-date figure includes credit amounts from prior year reversals of certain accruals related to final performance agreement payouts under previous grants and the reduction of stock price for valuing compensation expense in the current year.

 

Total stock-based compensation expense recognized for the three months ended March 31, 2021 and 2020 was $121,477 and $84,340, respectively. As of March 31, 2021, there was $677,220 of unrecognized compensation expense related to non-vested restricted stock awards to be recognized over the remaining vesting period.

 

 

Note 10: Income Per Common Share

 

  

For three months ended March 31, 2021

 
  

Income Available

to Common

Stockholders

  

Weighted Average

Common Shares

Outstanding

  

Per

Common Share

 

Basic Income per Common Share

 $2,216,016   4,337,870  $0.51 

Effect of Dilutive Securities

      12,226     

Diluted Income per Common Share

 $2,216,016   4,350,096  $0.51 

 

  

For three months ended March 31, 2020

 
  

Income Available

to Common

Stockholders

  

Weighted Average

Common Shares

Outstanding

  

Per

Common Share

 

Basic Income per Common Share

 $2,104,845   4,309,441  $0.49 

Effect of Dilutive Securities

      26,861     

Diluted Income per Common Share

 $2,104,845   4,336,302  $0.49 

 

23
 

 
 

Note 11: New Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019 (2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has formed a committee that is assessing our data and evaluating the impact of adopting ASU 2016-13. The Company has also selected a third-party vendor to assist in generating loan level cash flows and disclosures. Based on the results from larger SEC filers and preliminary internal calculations there is likely a significant financial impact of adopting this standard. Estimated amounts and decisions pertaining to implementation of this standard will be evaluated over the next several quarters.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment.  To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test.  The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount.  An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  In addition, the income tax effects of tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the quantitative assessment for a reporting unit to determine if the qualitative impairment test is necessary.  The amendments should be applied on a prospective basis.  The nature of and reason for the change in accounting principle should be disclosed upon transition.  This standard was adopted during the second quarter of 2020 with no impact on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU applies to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. Disclosures removed by this ASU are the amount and reasons for transfers between Level 1 and Level 2, the policy for timing of transfers between levels and the valuation process for Level 3 measurements. This ASU modifies disclosures relating to investments in certain entities that calculate net asset value. Additional disclosures require by the ASU include: 1) change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and 2) range and weighted average of significant observable inputs used to develop Level 3 measurements. The prospective method of transition is required for the new disclosure requirements. The other amendments should be applied retrospectively. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years or January 1, 2020 for the Company. The Company adopted this standard during the first quarter of 2020 with no significant impact on the financial statements.

 

24
 

 

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). This ASU provides guidance and timelines for the future transition from London Interbank Offered Rate (LIBOR) to alternative reference rates that are more observable or transaction based and less susceptible to manipulation. For financial institutions this will likely impact contracts already in place that reference LIBOR as the variable rate component. Items likely to be impacted are interest rate swaps, subordinated debt offerings, certain adjustable-rate loan contracts, certain variable rate investment instruments as well as other variable rate contracts. Current guidance has the use of LIBOR reference rates to end by December 31, 2021. In the meantime, institutions are to identify contracts that reference LIBOR, prepare their current systems for a transition to a new reference rate and to communicate any changes to impacted parties. The Company has identified existing items that reference LIBOR and is in the process of evaluating fall back language in each situation along with working with system providers and other third parties to ensure a successful adoption of new reference rates. The financial impact of adopting this standard is being evaluated with estimated amounts and decisions pertaining to implementation of this standard to be evaluated over the next several quarters.

 

 

Note 12: Derivative Financial Instruments

 

The Company records all derivative financial instruments at fair value in the financial statements. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks.

 

When a derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as 1) a hedge of fair value of a recognized asset or liability (fair value hedge) or 2) a hedge of a forecasted transaction, such as, the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The written documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly effective.

 

In June 2017, the Company entered into a forward start interest rate swap agreement totaling $50 million notional amount to hedge against interest rate risk on FHLB advances. The swap rate paid is 2.12% and is hedged against three-month floating LIBOR with a termination date of February 2025. As a cash flow hedge, the portion of the change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. At March 31, 2021, the Company reported a $2,053,389 unrealized loss, net of a $648,438 tax effect, in other comprehensive income related to this cash flow hedge.

 

In March 2019, the Company entered into a forward start interest rate swap agreement totaling $10.3 million notional amount to hedge against interest rate risk on variable rate subordinated debentures. The swap rate paid is 4.09% and is hedged against three-month floating LIBOR plus 145 basis points with a termination date of February 2026. As a cash flow hedge, the portion of the change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. At March 31, 2021, the Company reported a $628,821 unrealized loss, net of a $198,575 tax effect, in other comprehensive income related to this cash flow hedge.

 

The Company documents, both at inception and periodically over the life of the hedges, its analysis of actual and expected hedge effectiveness.

 

As of March 31, 2021, based on current fair values, the Company pledged cash collateral of $4.1 million to its counterparty for the swaps, included on the balance sheet in interest-bearing demand deposits in other financial institutions. As of December 31, 2020, based on then current fair values, the Company had pledged cash collateral of $5.1 million to the counterparty.

 

25
 

 

The following table presents the notional amounts and fair values of derivatives designated as hedging instruments on the consolidated balance sheets at March 31, 2021 and December 31, 2020:

 

Derivatives designated as hedging instruments:

                    
                

March 31, 2021

        

Forward Start

 

Termination

 

Derivative

 

Notional

  

Rate

  

Rate

 

Balance Sheet

 

Estimated Fair Value at:

 

Inception Date

 

Date

 

Type

 

Amount

  

Paid

  

Hedged

 

Classfication

 

March 31, 2021

  

December 31, 2020

 
                         

2/28/2018

 

2/28/2025

 

Interest rate swap -

FHLB Advances

 $50,000,000   2.12% 

3 month LIBOR

Floating

 

Other liabilites

 $(2,701,827) $(3,760,287)
                         

5/23/2019

 

2/23/2026

 

Interest rate swap -

Subordinated Debentures

 $10,310,000   4.09% 

3 month LIBOR

Floating +145 bps

 

Other liabilites

 $(827,396) $(1,180,909)

 

The following table presents amounts included in the consolidated statements of income for derivatives designated as hedging instruments for the periods indicated:

 

Derivative

 

Income Statement

 

Three months ended March 31,

 

Type

 

Classfication

 

2021

  

2020

 
           

Interest rate swap -

FHLB Advances

 

Interest expense

 $238,411  $39,841 
           

Interest rate swap -

Subordinated Debentures

 

Interest expense

 $62,962  $21,441 

 

 

Note 13: Disclosures about Fair Value of Assets and Liabilities

 

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices in active markets for identical assets or liabilities

 

Level 2: 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 for substantially the full term of the assets or liabilities

 

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

The following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Available-for-sale securities: Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one or a combination of observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bid offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. government agencies, municipal securities and government sponsored mortgage-backed securities. The Company has no Level 3 securities.

 

Derivative financial instruments (Cash flow hedge): The Company’s open derivative positions are interest rate swap agreements. Those classified as Level 2 open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets.

 

26
 

 

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2021 and December 31, 2020 (dollar amounts in thousands):

 

March 31, 2021

                

Financial assets:

                
  

Level 1 inputs

  

Level 2 inputs

  

Level 3 inputs

  

Total fair value

 

Debt securities:

                

Government agencies

 $-  $6,985  $-  $6,985 

Municipals

  -   67,466   -   67,466 

Corporates

  -   34,634   -   34,634 

Mortgage-backed securities - private label

  -   16,007   -   16,007 

Government sponsored asset-backed securities and SBA loan pools

  -   54,243   -   54,243 

Available-for-sale securities

 $-  $179,335  $-  $179,335 
                 

Financial liabilities:

                

Interest rate swaps

 $-  $3,529  $-  $3,529 

 

December 31, 2020

                

Financial assets:

                
  

Level 1 inputs

  

Level 2 inputs

  

Level 3 inputs

  

Total fair value

 

Debt securities:

                

Government agencies

 $-  $6,284  $-  $6,284 

Municipals

  -   61,969   -   61,969 

Corporates

  -   30,601   -   30,601 

Mortgage-backed securities - private label

  -   14,896      14,896 

Government sponsored mortgage-backed securities and SBA loan pools

  -   50,371   -   50,371 

Available-for-sale securities

 $-  $164,121  $-  $164,121 
                 

Financial liabilities:

                

Interest rate swaps

 $-  $4,941  $-  $4,941 

 

The following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying statements of financial condition, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Foreclosed Assets Held for Sale: Fair value is estimated using recent appraisals, comparable sales and other estimates of value obtained principally from independent sources, adjusted for selling costs and discounts based on management’s assessment of the condition and marketability of the collateral. Foreclosed assets held for sale are classified within Level 3 of the valuation hierarchy.

 

Impaired loans (Collateral Dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.

 

27
 

 

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

 

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2021 and December 31, 2020 (dollar amounts in thousands):

 

Impaired loans:

                
  

Level 1 inputs

  

Level 2 inputs

  

Level 3 inputs

  

Total fair value

 

March 31, 2021

 $-  $-  $1,418  $1,418 
                 

December 31, 2020

 $-  $-  $5,809  $5,809 

 

Foreclosed assets held for sale:

                
  

Level 1 inputs

  

Level 2 inputs

  

Level 3 inputs

  

Total fair value

 

March 31, 2021

 $-  $-  $-  $- 
                 

December 31, 2020

 $-  $-  $371  $371 

 

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurement (dollar amounts in thousands):

 

  

Fair Value

March 31, 2021

 

Valuation

Technique

 

Unobservable

Input

 

Range
(Weighted Average)

Impaired loans (collateral dependent)

 $1,418 

Market Comparable

 

Discount to reflect

realizable value

 0%-80%(16%)

Foreclosed assets held for sale

 $- 

Market Comparable

 

Discount to reflect

realizable value

   0%(0%)

 

  

Fair Value

December 31, 2020

 

Valuation

Technique

 

Unobservable

Input

 

Range
(Weighted Average)

Impaired loans (collateral dependent)

 $5,809 

Market Comparable

 

Discount to reflect

realizable value

 1%-80%(7%)

Foreclosed assets held for sale

 $371 

Market Comparable

 

Discount to reflect

realizable value

 4%-4%(4%)

 

28
 

 

The following tables present estimated fair values of the Company’s financial instruments at March 31, 2021 and December 31, 2020.

 

  

March 31, 2021

  

December 31, 2020

 
  

Carrying
Amount

  

Fair
Value

  

Hierarchy
Level

  

Carrying
Amount

  

Fair
Value

  

Hierarchy
Level

 

Financial assets:

                      

Cash and cash equivalents

 $220,238,289  $220,238,289  1  $148,422,908  $148,422,908  1 

Interest-bearing time deposits at other institutions

  2,455,000   2,455,135  2   4,760,089   4,771,605  2 

Federal Home Loan Bank stock

  4,088,700   4,088,700  2   3,896,900   3,896,900  2 

Mortgage loans held for sale

  7,990,141   8,177,951  2   11,359,174   11,626,174  2 

Loans, net

  743,220,776   735,178,970  3   742,149,271   737,701,011  3 

Interest receivable

  4,043,621   4,043,621  2   4,060,795   4,060,795  2 

Financial liabilities:

                      

Deposits

  1,023,136,682   1,023,880,736  2   938,672,541   939,806,149  2 

FHLB advances

  66,000,000   66,072,251  2   66,000,000   66,089,183  2 

Subordinated debentures issued to Capital Trusts

  15,465,000   15,465,000  3   15,465,000   15,465,000  3 

Subordinated notes, net

  19,575,492   27,001,113  3   19,564,131   25,608,997  3 

Interest payable

  564,439   564,439  2   932,172   932,172  2 

Unrecognized financial instruments (net of contractual value):

                      

Commitments to extend credit

  -   -  -   -   -  - 

Unused lines of credit

  -   -  -   -   -  - 

 
 

Note 14: Subsequent Event

 

On April 8, 2021, the Company notified investors of its $5,155,000 aggregate principal amount of 6.92% Fixed Rate Junior Subordinated Debt Securities due 2036 (the “Debt Securities”) issued by a statutory trust subsidiary, Guaranty Statutory Trust I; and of its intent to fully redeem the issuance as allowed per Debt Securities agreements from its inception in 2005. All outstanding principal amounts, plus accrued and unpaid distributions will be redeemed as of May 23, 2021. Proceeds from a 2020 subordinated debt offering and a cash dividend from the Bank will be used to redeem the 2005 debt securities. The Company received all necessary regulatory approvals prior to the redemption of these instruments.

 

 

Note 15: Concentration of Cash Holdings

 

During the normal course of business, the Bank may have excess cash on deposit at other financial institutions. Each institution’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At March 31, 2021, the Bank had $81.0 million in deposits above FDIC insured limits. These funds are held with three institutions that are each shown to be well capitalized as of March 31, 2021. Additionally, the Bank held $127.3 million in deposits at the Federal Reserve Bank at March 31, 2021.

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

The primary function of the Company is to monitor and oversee its investment in the Bank. The Company engages in few other activities, and the Company has no significant assets other than its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank’s results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank’s income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews material changes in the Company’s financial condition as of March 31, 2021, and the results of operations for the three months ended March 31, 2021 and 2020.

 

29
 

 

Forward-Looking Statements

 

The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this Form 10-Q.  When used in this Form 10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  Such statements are subject to risks and uncertainties.  The following factors or combination of factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the severity, magnitude and duration of COVID-19 and the direct and indirect impacts of COVID-19, as well as responses to COVID-19 by the government, businesses and consumers; the disruption of global, national, state and local economies associated with COVID-19; the strength of the United States economy in general and the strength of the real estate values and the local economies in which the Company conducts operations; insufficient provisions for loan losses (which could reduce earnings for several periods until acceptable levels are reached); new accounting standards for calculating loan loss reserves (which may have a material adverse impact on our financial condition); merger or acquisition activity (which may not produce anticipated results); changes in portfolio composition; a decrease in cash flows from our investment portfolio (which may adversely affect our liquidity); changes in management strategy; increased competition from both bank and non-bank companies, the impact of recent and potential future changes in the laws, rules, regulations, interpretations and policies relating to financial institutions, accounting, insurance, tax, monetary and fiscal matters and their application by our regulators; the effects of, and changes in, trade, monetary and fiscal policies and laws, changes in interest rates including negative interest rates; changes in LIBOR including the impact of the anticipated elimination of LIBOR and resultant transition to a new benchmark; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; asset quality deterioration; environmental liability associated with real estate collateral; technological changes and cybersecurity risks; employee retention; the success of the Company at managing the risks resulting from these factors; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission (the “SEC”) from time to time, including the risk factors described under Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

 

The Company cautions that the listed factors are not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

 

Impacts from COVID-19 on Our Financial Statements and Results of Operations

 

The spread of the COVID-19 pandemic has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States, including the markets that we serve. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that led to a loss of revenues and a rapid increase in unemployment, disrupted supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. However, in recent months, unemployment and business closings have moderated in our markets along with infection rates while community health guidelines are adjusted as vaccines and additional information become available. 

 

Financial Impacts to the Bank:  Due to segments of our loan portfolio experiencing weakness as a result of COVID-19-related economic slowdowns and travel restrictions, we recorded a significant increase in our provision for loan losses in 2020 of $3,600,000 with $500,000 recorded during the first three months of 2020. For the first three months of 2021, a provision of $400,000 was recorded. We expect that we could continue to experience increases in our provision for loan losses. We expect to continue working with impacted customers on a case-by-case basis based on their specific circumstances.  The Bank expects other ramifications to continue which may include increases in realized losses on loans and decreased fee income due to lower loan originations and deposit activity.  Market interest rates have fluctuated significantly over the past year which could continue to adversely affect our net interest income, net interest margin, unrealized gains and losses on certain financial instruments and overall earnings.    

 

30
 

 

Paycheck Protection Program (PPP) Activity:  The Federal government has approved various stimulus packages to assist small businesses, individuals, health care entities, education systems and certain governmental entities over the past year.  Availability and coverage of these programs continues to evolve as the breadth of the economic impact from COVID-19 unfolds.  One of the most notable programs was the Coronavirus Aid, Relief and Economic Security (CARES) Act which made over $600 billion in funds available to small businesses through Small Business Administration (SBA) PPP loans that, based on certain qualifications, could provide funds to qualified borrowers for payroll and certain other costs with portions or all of such loans potentially forgiven if used on certain expenses and other criteria were met.  The PPP funding programs were heavily utilized by businesses leading to robust activity at many financial institutions, including ours.  The Bank approved and funded 661 PPP loans during 2020 totaling $55.1 million and impacting nearly 8,400 jobs in the communities we serve.  In late December 2020, an additional $284 billion in PPP funds was approved for eligible entities based on certain qualifications.  The Bank has approved and funded 226 PPP loans totaling $14.1 million during the quarter ended March 31, 2021 in this most recent round of funding.  Overall, approximately $3.1 million in origination fees will be recognized over the life of the individual PPP loans by the Bank. As of March 31, 2021, $33.8 million in PPP loans are included in our commercial loan portfolio.  PPP loans originated in 2020 totaling $35.4 million have already been granted forgiveness by the SBA.  The Bank is continually monitoring regulatory guidelines that will impact PPP loans that we are involved with along with any additional governmental programs that could materially impact our customers and the Bank’s financial situation. 

 

Market Volatility Risk: As noted herein, the COVID-19 pandemic has led to disruption and volatility in the global capital markets. These conditions may require us to recognize an elevated level of other than temporary impairments on investment securities in our portfolio as issues of these securities are negatively impacted by the economic slowdown. Declines in fair value of investment securities in our portfolio could also reduce the unrealized gains reported as part of our consolidated comprehensive income.

 

Loan Modifications: As previously mentioned, increased loan payment deferrals and other loan modifications have adversely impacted, and we expect that they will continue to adversely impact, the performance of our loan portfolio.  Based on recent guidance by federal banking regulators, the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) and provisions within the CARES Act, short-term loan modifications made in response to COVID-19 to borrowers with a current payment status are not to be considered troubled debt restructurings (TDRs) for reporting purposes.  As of March 31, 2021, 13 loans with an aggregate balance of $19.4 million were modified in response to COVID-19 with additional details noted in the following table.

 

COVID-19 Loan Modifications

 

Collateral Type

  

# Loans

Modified

    

Amount of Loans

Modified ($)

   

Interest Only 3

Months or Less

   

Interest Only

4-6 Months

   

Full Payment

Deferral 3

Months

   

Full Payment Deferral

3 Months + Interest

Only 3 Months

   

Full Payment

Deferral 4-6

Months

   

Full Payment

Deferral > 6

Months

 

Hotel/Motel

   4     $ 7,840,689     $ -     $ -     $ -     $ 1,849,520     $ -     $ 5,991,169  

Theatre

   5       10,586,792       -       -       -       -       -       10,586,792  

Restaurant (C&I & RE)

   1       287,793       -       287,793       -       -       -       -  

1-4 Family Consumer

   1       23,758       -       -       23,758       -       -       -  

Other

   2       630,657       537,557       93,100       -       -       -       -  

Total Modified Loans

   13     $ 19,369,689     $ 537,557     $ 380,894     $ 23,758     $ 1,849,520     $ -     $ 16,577,961  

 

31
 

 

Financial Condition

 

The Company’s total assets increased $82,782,569 (7%) from $1,146,252,939 as of December 31, 2020, to $1,229,035,508 as of March 31, 2021, primarily due to cash and investments activity resulting from increased deposit balances.

 

Available-for-sale securities increased $15,213,696 (9%) from $164,120,869 as of December 31, 2020, to $179,334,565 as of March 31, 2021. The Company had purchases of $30,918,248 offset by a decrease in unrealized gains of $3,137,599 and sales, calls, maturities and principal payments of $12,513,814 during the three-month period.

 

Net loans receivable increased by $1,071,505 (less than 1%) from $742,149,271 as of December 31, 2020 to $743,220,776 as of March 31, 2021. Year-to-date, construction loans increased $14,864,621 (21%), commercial real estate loans increased $2,987,353 (1%), one-to-four family mortgage loans decreased $1,092,930 (1%), permanent multi-family loans decreased $1,675,390 (2%), consumer loans decreased $2,089,611 (8%) and commercial loans decreased $11,249,628 (8%). The Company continues to focus its lending efforts in the commercial, owner-occupied real estate and small business lending categories.

 

Allowance for loan losses increased $270,915 (3%) from $9,617,024 as of December 31, 2020 to $9,887,939 as of March 31, 2021. Provisions for loan losses of $400,000 were recorded by the Company for the three months ended March 31, 2021. This expense reflects an increased provision resulting from stress on our loan portfolio from the increase in unemployment and economic effects attributable to the COVID-19 pandemic. The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of March 31, 2021 and December 31, 2020 was 1.31% and 1.28%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of March 31, 2021 and December 31, 2020 was 55.6% and 51.6%, respectively. Management believes the allowance for loan losses at March 31, 2021 is at a level to be sufficient in providing for potential loan losses in the Bank’s existing loan portfolio even after taking the expected loan defaults attributable to COVID-19 into account.

 

In accordance with generally accepted accounting principles (GAAP) for acquisition accounting, the loans acquired through the Hometown acquisition were recorded at fair value; therefore, there was no allowance associated with these loans. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount of approximately $490,000 as of March 31, 2021.

 

Deposits increased $84,464,141 (9%) from $938,672,541 as of December 31, 2020, to $1,023,136,682 as of March 31, 2021. For the three months ended March 31, 2021, checking and savings accounts increased by $98,753,934 (13%) primarily due to the continued focus on attracting and retaining retail, commercial and public fund relationships. Additionally, a significant amount of the increase was due to government stimulus program funds being retained in deposit accounts by both individuals and businesses. Certificates of deposit balances decreased by $14,289,793 (8%) as many higher yielding balances matured and choose to reinvest into more liquid accounts. See also the discussion under Item 3 - “Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management.”

 

Stockholders’ equity increased $358,172 (less than 1%) from $88,968,366 as of December 31, 2020, to $89,326,538 as of March 31, 2021. The Company’s net income during this period exceeded dividends paid or declared by $1,561,168. Other items impacting equity balances during the three-month period include decreases in unrealized gains in the investment portfolio of $2,723,449 offset by an improvement in unrealized losses from interest rate swaps of $1,411,973. On a per common share basis, tangible book value increased to $19.78 as of March 31, 2021 compared to $19.71 as of December 31, 2020.

 

Average Balances, Interest and Average Yields

 

The Company’s profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans and debt and equity securities, and the cost of deposits and borrowings. Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities. Non-interest income, non-interest expense, and income taxes also impact net income.

 

32
 

 

The following table sets forth certain information relating to the Company’s average consolidated statements of financial condition and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense annualized by the average balance of assets or liabilities, respectively, for the periods shown. Average balances were derived from average daily balances. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields. All dollar amounts are in thousands.

 

   

Three months ended 3/31/2021

    

Three months ended 3/31/2020

  
   

Average

Balance

    

Interest

    

Yield /

Cost

    

Average

Balance

    

Interest

    

Yield /

Cost

  

ASSETS

                                               

Interest-earning:

                                                

Loans

   $ 760,814     $ 8,817       4.70 %   $ 733,591     $ 9,553       5.24 %

Investment securities

     171,137       1,025       2.43 %     125,851       885       2.83 %

Other assets

     197,564       135       0.28 %     96,515       361       1.50 %

Total interest-earning

     1,129,515       9,977       3.58 %     955,957       10,799       4.54 %

Noninterest-earning

     69,606                       71,533                  
    $ 1,199,121                     $ 1,027,490                  
                                                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                         

Interest-bearing:

                                                

Savings accounts

   $ 51,011       16       0.13 %   $ 39,704       26       0.26 %

Transaction accounts

     586,019       495       0.34 %     503,138       1,378       1.10 %

Certificates of deposit

     178,252       789       1.80 %     199,349       1,090       2.20 %

FHLB advances

     66,000       311       1.91 %     51,482       274       2.14 %

Subordinated debentures issued to Capital Trusts

     15,465       195       5.11 %     15,465       196       5.10 %

Subordinated notes, net

     19,568       263       5.45 %     -       -       0.00 %

Other borrowed funds

     521       2       1.56 %     11,491       123       4.31 %

Total interest-bearing

     916,836       2,071       0.92 %     820,629       3,087       1.51 %

Noninterest-bearing

     191,848                       120,825                  

Total liabilities

     1,108,684                       941,454                  

Stockholders’ equity

     90,437                       86,036                  
    $ 1,199,121                     $ 1,027,490                  

Net earning balance

   $ 212,679                     $ 135,328                  

Earning yield less costing rate

                     2.66 %                     3.03 %

Net interest income, and net yield spread on interest earning assets

           $ 7,906       2.84 %           $ 7,712       3.24 %

Ratio of interest-earning assets to interest-bearing liabilities

             123 %                     116 %        

 

Results of Operations - Comparison of Three-Month Periods Ended March 31, 2021 and 2020

 

Net income for the three months ended March 31, 2021 was $2,216,016 compared to $2,104,845 for the three months ended March 31, 2020, which represents an increase in earnings of $111,171 (5%).

 

Interest Income

 

Total interest income for the three months ended March 31, 2021 decreased $822,253 (8%) when compared to the same period in 2020. When compared to the three-month period ended March 31, 2021 with the same period in 2020, the average yield on interest earning assets decreased 96 basis points to 3.58% while the average balance of interest earning assets increased approximately $173,558,000. The increase in the average balances for the period is primarily due to increased cash and investments balances generated from increased deposits. For the three-month period, the yield on loans decreased 54 basis points to 4.70%. Negatively impacting loan interest income and yield on loans were continued decreases in loan rates on new and repricing credits. Helping to offset this decline was $511,441 of loan fees recognized from the origination and forgiveness of PPP loans in the three-month period ended March 31, 2021. No loan fees from this source were recognized in the same period in 2020.

 

Interest Expense

 

Total interest expense for the three months ended March 31, 2021 decreased $1,015,392 (33%) when compared to the three months ended March 31, 2020. For the three months ended March 31, 2021 compared to the same period in 2020, the average cost of interest-bearing liabilities decreased 59 basis points to 0.92% primarily due to the reductions to key interest rates by the Federal Reserve during the first quarter of 2020 and higher rate liabilities resetting lower as they reprice or mature. Offsetting rate declines, the average balance of interest-bearing liabilities increased approximately $96,207,000 for the three-month period as depositors, in general, maintained higher balances in accounts and the continued growth in public funds. The Company intends to continue to utilize a cost-effective mix of retail and commercial deposits along with non-core, wholesale funding.

 

33
 

 

Provision for Loan Losses

 

Provisions for loan losses are charged or credited to earnings to bring the total allowance for loan losses to a level considered adequate by the Company to provide for potential loan losses in the existing loan portfolio. When making its assessment, the Company considers prior loss experience, volume and type of lending, local banking trends and impaired and past due loans in the Company’s loan portfolio. In addition, the Company considers general economic conditions and other factors related to collectability of the Company’s loan portfolio, including the effect on the ability of some borrowers to repay their loans in accordance with their terms or at all due to the impact of COVID-19.

 

Based on its internal analysis and methodology, management recorded a provision for loan losses of $400,000 for the three months ended March 31, 2021 compared to $500,000 for the same period in 2020. The decision to fund the provision for the quarter was based on growth in construction loans and a conservative approach to possible continued weaknesses due to the COVID-19 pandemic. Overall economic conditions impacting both individuals and businesses have already led to loan payment deferrals and modifications of loan agreements discussed earlier.

 

The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management may need to increase the allowance for loan losses through charges to the provision for loan losses if anticipated growth in the Bank’s loan portfolio increases or other circumstances warrant. Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.

 

Non-Interest Income

 

Non-interest income increased $516,350 (25%) for the three months ended March 31, 2021 when compared to the three months ended March 31, 2020. When compared to the first three months of 2020, the Company had decreased income of $555,490 (100%) recognized from fees generated from a commercial loan swap product and service charge revenue decreased by $45,142 (11%). However, higher income recognized from the sale of mortgage loans of $528,401 (97%) and increased income from sales of Small Business Administration (“SBA”) and other government guaranteed loans of $423,539 (100%) more than offset the previously noted decreases.

 

Non-Interest Expense

 

Non-interest expense increased $656,454 (10%) for the three months ended March 31, 2021 when compared to the same period in 2020.  Significant non-interest expense items are as follows:

 

 

●

Salaries and employee benefit expenses increased $416,765 (11%) for the quarter ended March 31, 2021 compared to the same period in 2020 primarily due to the hiring of a new commercial banking executive and relationship managers and increased commissions and incentives related to strong mortgage lending activity.
 

●

FDIC assessment premiums increased by $143,206 (100%) when compared to the first quarter of 2020 due to previously awarded credits completely offsetting fees in the beginning of 2020.

 

Provision for Income Taxes

 

The provision for income taxes increased by $41,864 (10%) for the three-month period ended March 31, 2021 when compared to the same period in 2020. The increase in the provision for income taxes for the quarter is primarily due to slightly higher taxable income amounts and corporate income tax rates.

 

34
 

 

Nonperforming Assets

 

The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank’s existing loan portfolio. When making such evaluation, management considers such factors as the repayment status of its loans, the estimated net realizable value of the underlying collateral, borrowers’ intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank’s historical loss ratios. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of March 31, 2021 and December 31, 2020 was 55.6% and 51.6%, respectively. Total loans classified as substandard, doubtful or loss as of March 31, 2021 were $56,810,000 or 4.62% of total assets as compared to $63,491,000 or 5.54% of total assets at December 31, 2020. Management considered nonperforming and total classified loans in evaluating the adequacy of the Bank’s allowance for loan losses.

 

The ratio of nonperforming assets to total assets is another useful tool in evaluating exposure to credit risk. Nonperforming assets of the Bank are comprised of nonperforming loans (including troubled debt restructurings) and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. All dollar amounts are in thousands.

 

   

3/31/2021

    

12/31/2020

    

12/31/2019

  

Nonperforming loans

   $ 17,780     $ 18,629     $ 10,003  

Real estate acquired in settlement of loans

     745       546       992  

Total nonperforming assets

   $ 18,525     $ 19,175     $ 10,995  
                         

Total nonperforming assets as a percentage of total assets

     1.51 %     1.67 %     1.09 %

Allowance for loan losses

   $ 9,888     $ 9,617     $ 7,608  

Allowance for loan losses as a percentage of gross loans

     1.31 %     1.28 %     1.04 %
                         

Nonperforming Loans

     17,780       18,629       10,003  

Allowance for loan losses as a percentage of nonperforming loans

     55.6 %     51.6 %     76.1 %

 

Liquidity and Capital Resources

 

Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company’s primary sources of liquidity include cash and cash equivalents, customer deposits and FHLB borrowings. The Company also has established secured borrowing lines available from the Federal Reserve Bank which, is considered a secondary source of funds.

 

The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time. The Company’s cash and cash equivalents totaled $220,238,289 as of March 31, 2021 and $148,422,908 as of December 31, 2020, representing an increase of $71,815,381 (48%). The variations in levels of cash and cash equivalents are influenced by many factors but primarily loan originations and payments and deposit fluctuations.

 

35
 

 

A final rule issued on September 17, 2019 by federal banking regulators provides a simpler method of measuring adequate capital ratios for community banking organizations. The community bank leverage ratio (CBLR) framework is an optional framework that is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. The framework provides a simple measure of capital adequacy for qualifying community banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9 percent are considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rule. These institutions also must have met well-capitalized ratio requirements for purposes of Section 38 of the Federal Deposit Insurance Act. The final rule went into effect on January 1, 2020. During the first quarter of 2020, the CARES Act introduced interim CBLR provisions that allow for extended periods for institutions that fall below the 9.0 percent threshold to gradually increase their ratio from minimums of 8.00% in 2020, 8.50% in 2021 and 9.00% in 2022. Additionally, federal banking guidelines provide that financial institutions experiencing significant growth could be expected to maintain capital levels above the minimum requirements without significant reliance on intangible assets. Additionally, higher capital levels could be required under certain circumstances, such as situations involving interest rate risk, risk from concentrations of credit, or nontraditional activities. Accordingly, the Company and the Bank could be required to maintain higher capital levels in the future even if we otherwise fully comply with the CBLR rule.

 

The Bank opted in to the new CBLR framework during the first quarter of 2020. As of March 31, 2021, the Bank’s common equity Tier 1 ratio was 9.60% which exceeded the current minimum of 8.50%.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Asset/Liability Management

 

The goal of the Bank’s asset/liability policy is to manage interest rate risk so as to maximize net interest income over time in changing interest rate environments. Management monitors the Bank’s net interest spreads (the difference between yields received on assets and paid on liabilities) and, although constrained by market conditions, economic conditions, and prudent underwriting standards, the Bank offers deposit rates and loan rates designed to maximize net interest income. Management also attempts to fund the Bank’s assets with liabilities of a comparable duration to minimize the impact of changing interest rates on the Bank’s net interest income. Since the relative spread between financial assets and liabilities is constantly changing, the Bank’s current net interest income may not be an indication of future net interest income.

 

As a part of its asset and liability management strategy and throughout the past several years, the Bank has continued to emphasize the origination of short-term commercial real estate, commercial business and consumer loans, while originating fixed-rate, one- to four-family residential loans primarily for immediate resale in the secondary market.

 

The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank’s asset/liability management objectives and spread requirements. The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive core deposits.

 

Interest Rate Sensitivity Analysis

 

The following table sets forth as of March 31, 2021 management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100 and 200 basis point (“BP”) instantaneous and permanent increases and decreases in market interest rates. Dollar amounts are expressed in thousands.

 

BP Change

    

Estimated Net Portfolio Value

    

NPV as % of PV of Assets

  

in Rates

    

$ Amount

    

$ Change

    

% Change

    

NPV Ratio

    

Change

  

+200

     $ 152,052     $ 24,819       20 %     12.71 %     2.29 %

+100

       141,456       14,223       11 %     11.70 %     1.27 %

NC

       127,233       -       0 %     10.42 %     0.00 %
-100       100,673       (26,560 )     -21 %     8.17 %     -2.26 %
-200       97,607       (29,626 )     -23 %     7.85 %     -2.57 %

 

36
 

 

Computations of prospective effects of hypothetical interest rate changes are based on an internally generated model using actual maturity and repricing schedules for the Bank’s loans and deposits, and are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit run-offs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity Analysis section of Quantitative and Qualitative Disclosures About Market Risk included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

 

Management cannot predict future interest rates or their effect on the Bank’s NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have an initial fixed rate period typically from one to five years, and over the remaining life of the asset changes in the interest rate are restricted. In addition, the proportion of adjustable-rate loans in the Bank’s portfolio could decrease in future periods due to refinancing activity if market interest rates remain steady in the future. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

 

The Bank’s Board of Directors is responsible for reviewing the Bank’s asset and liability management policies. The Board meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank’s management is responsible for administering the policies and determinations of the Board with respect to the Bank’s asset and liability goals and strategies.

 

Item 4. Controls and Procedures

 

(a) The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act") that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

During the quarter ended March 31, 2021, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021.

 

(b) There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II

Item 1.         Legal Proceedings

None.

 

Item 1A. Risk Factors

Not applicable.

 

37
 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company has a stock repurchase plan which was announced on February 28, 2020. This plan allows for the purchase of up to 250,000 shares of the Company’s outstanding common stock and expires December 31, 2022. There are no other repurchase plans in effect at this time. During the quarter ended March 31, 2021, the Company had no repurchase activity of its common stock. As of March 31, 2021, the ability to repurchase up to 235,591 shares under the 2020 repurchase plan remains.

 

Item 3.         Defaults Upon Senior Securities

Not applicable.

 

Item 4.         Mine Safety Disclosures

Not applicable.

 

Item 5.         Other Information

None

 

Item 6.         Exhibits

 

 

10.1

Written Description of 2021 Executive Incentive Compensation Annual Plan - President and Chief Executive Officer* (1)
 

10.2

Written Description of 2021 Executive Incentive Compensation Annual Plan- Chief Financial Officer* (2)
 

10.3

Written Description of 2021 Executive Incentive Compensation Annual Plan- Chief Operating Officer* (3)
 

10.4

Written Description of 2021 Executive Incentive Compensation Annual Plan- Chief Credit Officer* (4)
 

10.5

Written Description of 2020 Executive Incentive Compensation Annual Plan- Chief Commercial Banking Officer* (5)
 

31(i).1

Certification of the Principal Executive Officer pursuant to Rule 13a -14(a) of the Exchange Act †
 

31(i).2

Certification of the Principal Financial Officer pursuant to Rule 13a - 14(a) of the Exchange Act †
 

32

Officer certifications pursuant to 18 U.S.C. Section 1350 †
  101 The following materials from Guaranty Federal Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Income (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (unaudited), (iv) Condensed Consolidated Statement of Stockholders’ Equity (unaudited), (v) the Condensed Consolidated Statements of Cash Flows (unaudited), and (vi) related notes.
  104 Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

† Filed herewith

_____________________________________________________________________________________________

 

(1)

Filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on March 5, 2021 and incorporated herein by reference.
 

(2)

Filed as Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on March 5, 2021 and incorporated herein by reference.
 

(3)

Filed as Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on March 5, 2021 and incorporated herein by reference.
 

(4)

Filed as Exhibit 10.4 to the Current Report on Form 8-K filed by the Registrant on March 5, 2021 and incorporated herein by reference.
 

(5)

Filed as Exhibit 10.5 to the Current Report on Form 8-K filed by the Registrant on March 5, 2021 and incorporated herein by reference.

 

38
 

 

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.

 

Guaranty Federal Bancshares, Inc.

 

 

 

Signature and Title

Date
   

/s/ Shaun A. Burke                               

May 7, 2021

Shaun A. Burke

  

President and Chief Executive Officer

  

(Principal Executive Officer and Duly Authorized Officer)

  
   
   
   

/s/ Carter M. Peters                               

May 7, 2021

Carter M. Peters

  

Executive Vice President and Chief Financial Officer

  

(Principal Financial and Accounting Officer)

  

 

39