HOME BANCORP, INC. - Annual Report: 2021 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the fiscal year ended: December 31, 2021
or
| ☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
Commission File Number: 001-34190
HOME BANCORP, INC.
(Exact name of Registrant as specified in its charter)
| Louisiana | 71-1051785 | |||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |||||||
503 Kaliste Saloom Road, Lafayette, Louisiana | 70508 | |||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||
Registrant’s telephone number, including area code: (337) 237-1960
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||
| Common Stock, $0.01 par value per share | HBCP | The Nasdaq Stock Market, LLC | ||||||
Securities registered pursuant to Section 12(g) of the Act: none
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the 7,845,374 shares of the Registrant’s common stock held by non-affiliates, based upon the closing price of $38.11 for the common stock on June 30, 2021, as reported by the Nasdaq Stock Market, was approximately $299.0 million. Shares of common stock held by the registrant’s executive officers, directors and certain benefit plans have been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Number of shares of common stock outstanding as of March 7, 2022: 8,480,939
DOCUMENTS INCORPORATED BY REFERENCE
Set forth below are the documents incorporated by reference and the part of the Form 10-K into which the document is incorporated:
Portions of the definitive Proxy Statement for the 2022 Annual Meeting of Shareholders are incorporated by reference into Part III, Items 10-14 of this Form 10-K.
HOME BANCORP, INC.
2021 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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GLOSSARY OF DEFINED TERMS
Below is a listing of certain acronyms, abbreviations and defined terms, among others, used throughout this Annual Report on Form 10-K. As used in this report, unless the context otherwise requires, the terms “we,” “our,” “us” or the “Company” refer to Home Bancorp, Inc., a Louisiana corporation, and the term “Bank” refers to Home Bank, National Association, a national bank and wholly-owned subsidiary of the Company (for periods prior to March 2, 2015, the term “Bank” refers to the predecessor federal savings bank, Home Bank). In addition, unless the context otherwise requires, references to the operations of the Company include the operations of the Bank.
| ACL | – | Allowance for credit losses | ESOP | – | Employee Stock Ownership Plan | |||||||||||||||
| ALL | – | Allowance for loan losses | FDIC | – | Federal Deposit Insurance Corporation | |||||||||||||||
| AOCI | – | Accumulated other comprehensive income | FASB | – | Financial Accounting Standards Board | |||||||||||||||
| ASC | – | Accounting Standards Codification | FHLB | – | Federal Home Loan Bank | |||||||||||||||
| ASU | – | Accounting Standards Update | FRB or Federal Reserve | – | Board of Governors of the Federal Reserve System | |||||||||||||||
| Bank | – | Home Bank, N.A., a wholly-owned subsidiary of the Company | GAAP | – | Generally Accepted Accounting Principles in the United States of America | |||||||||||||||
| BOLI | – | Bank-owned life insurance | NMTC | – | New Markets Tax Credit(s) | |||||||||||||||
| bps | – | basis points, 100 basis points being equal to 1.0% | OCC | – | Office of the Comptroller of the Currency | |||||||||||||||
| C&D | – | Construction and land | OCI | – | Other comprehensive income | |||||||||||||||
| C&I | – | Commercial and industrial | ORE | – | Other real estate | |||||||||||||||
| CAA | – | Consolidated Appropriations Act | PCD | – | Purchased credit deteriorated | |||||||||||||||
| CARES Act | – | Coronavirus Aid, Relief, and Economic Security Act | PCI | – | Purchased credit impaired | |||||||||||||||
| CBLR | – | Community bank leverage ratio | PPP | – | Paycheck Protection Program | |||||||||||||||
| CECL | – | Current expected credit losses | RRP | – | Recognition and Retention Plan | |||||||||||||||
CFPB | – | Consumer Financial Protection Bureau | SBA | – | Small Business Association | |||||||||||||||
| Company | – | Home Bancorp, Inc., a Louisiana corporation and the holding company for Home Bank, N.A. | SBIC | – | Small Business Investment Company | |||||||||||||||
| COVID-19 | – | The novel coronavirus | SEC | – | Securities and Exchange Commission | |||||||||||||||
| CRA | – | Community Reinvestment Act | SMB | – | St. Martin Bancshares, an entity the Company acquired on December 6, 2017 | |||||||||||||||
| CRE | – | Commercial real estate | TDR | – | Troubled debt restructuring | |||||||||||||||
Dodd-Frank Act | – | Dodd-Frank Wall Street Reform and Consumer Protection Act | TE | – | Taxable equivalent | |||||||||||||||
| EPS | – | Earnings per common share | U.S. | – | United States | |||||||||||||||
Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward looking statements (as defined in the Securities Exchange Act of 1934 and the regulations hereunder). Forward looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of Home Bancorp, Inc. and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward looking statements may be identified by the use of such words as: “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or words of similar meaning or future or conditional terms such as “will,” “would,” “should,” “could,” “may,” “likely,” “probably” or “possibly.” Forward looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumptions, many of which are difficult to predict and generally are beyond the control of Home Bancorp, Inc. and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward looking statements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows or real estate values; (2) the levels of noninterest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which Home Bancorp, Inc. is or will be doing business, being less favorable than expected; (6) political and social unrest, including acts of war or terrorism; (7) failure to fully realize all the benefits we anticipate in connection with our pending and any future acquisitions of other institutions or our assumptions made in connection therewith being inaccurate; or (8) legislation or changes in regulatory requirements adversely affecting the business of Home Bancorp, Inc. Home Bancorp, Inc. undertakes no obligation to update these forward looking statements to reflect events or circumstances that occur after the date on which such statements were made.
The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. Given its ongoing and dynamic nature, it is difficult to predict the full impact of COVID-19 on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated. As a result of the COVID-19 pandemic and the related adverse local and national economic consequences, our forward-looking statements are subject to the following additional risks, uncertainties and assumptions, among others:
•Demand for our products and services may decline;
•If high levels of unemployment occur, our loan delinquencies, non-performing assets and loan foreclosures may increase;
•Collateral for loans, especially real estate, may decline in value;
•Our allowance for loan losses may have to be increased if our borrowers continue to experience financial difficulties;
•As a result of the reduction in the Federal Reserve Board's target federal funds rate to near 0%, the yield on our interest-earning assets may decline more than the decline in the cost of our interest-bearing liabilities;
•A material decrease in our net income or a net loss over several quarters could result in a suspension of our stock repurchase program and/or a reduction of our quarterly stock dividend;
•Our cyber security risks may be increased as a result of more of our employees working remotely; and
•FDIC deposit insurance premiums may increase if the agency experiences additional resolution costs.
The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
PART I
Item 1. Business.
General. Home Bancorp, Inc. (the “Company”) is a Louisiana corporation and the holding company for Home Bank, N.A. (the “Bank”). The Bank, which is headquartered in Lafayette, Louisiana and is a wholly-owned subsidiary of the Company, currently conducts business through 38 banking offices in the Acadiana, Baton Rouge, Greater New Orleans and Northshore (of Lake Pontchartrain) regions of south Louisiana and the Natchez region of west Mississippi.
The Company is subject to regulation as a bank holding company by the Board of Governors of the Federal Reserve System (the “FRB” or the “Federal Reserve”). In September 2018, the Bank established HB Investment Fund I, LLC, a wholly-owned subsidiary of the Bank to invest in New Markets Tax Credits (“NMTC”) in our market areas.
The Bank is primarily engaged in attracting deposits from the general public and using those funds to invest in loans and securities. Our principal sources of funds are customer deposits, repayments of loans, repayments of investments and funds borrowed from outside sources such as the Federal Home Loan Bank (“FHLB”) of Dallas.
These funds are primarily used for the origination of loans, including one-to four-family first mortgage loans, home equity loans and lines, commercial real estate loans, construction and land loans, multi-family residential loans, commercial and industrial loans and consumer loans. The Bank derives its income principally from interest earned on loans and investment securities and, to a lesser extent, from fees received in connection with the origination of loans, service charges on deposit accounts and for other services. The Bank’s primary expenses are interest expense and general operating expenses, the most significant of which is compensation and benefits.
Although we continue to be an active originator of residential home mortgage loans and other consumer loans in our market areas, our efforts are focused on originating commercial real estate loans and commercial and industrial loans. Commercial real estate loans and commercial and industrial loans are deemed attractive due to their generally higher yields and shorter anticipated lives compared to single-family residential mortgage loans. In addition, the Bank views commercial real estate and commercial and industrial loans as attractive lending products because the Bank’s commercial borrowers typically maintain deposit accounts at the Bank, increasing the Bank’s core deposits.
The Company’s headquarters is located at 503 Kaliste Saloom Road, Lafayette, Louisiana, and our telephone number is (337) 237-1960. We maintain a website at www.home24bank.com, and we provide our customers with online banking services. Filings of the Company made with the Securities and Exchange Commission ("SEC") are available, without charge, on our website. Information on our website should not be considered a part of this Annual Report on Form 10-K.
Human Capital Resources
At December 31, 2021, we had 438 full-time employees and seven part-time employees. None of our employees are represented by a collective bargaining group, and we believe that the Company's relationship with its employees is good. We believe our ability to attract and retain employees is a key to the Bank's success.
Our human capital objectives include attracting, developing and retaining the best available talent from a diverse pool of candidates for the Bank. To do so, we strive to maintain competitive pay and benefits, regularly updating our compensation structure and periodically reviewing our compensation and benefits programs. Additionally, the Bank identifies opportunities and paths for the development of our staff, and we seek to, whenever possible, fill positions by promotion within. The Company recognizes that the skills and knowledge of its employees are critical to the success of the organization, and promotes training and continuing education as an ongoing function for employees.
We recognize the importance of our employee's financial health and well-being, and offer benefits such as a 401(k) retirement savings plan and make both matching and profit-sharing contributions to that plan, which also includes the Company's stock as an investment option. Benefit programs available to eligible employees include, in addition to the 401(k) retirement savings plan, health and life insurance, employee paid holidays and other benefits.
We value and promote diversity and inclusion in every aspect of our business and at every level within the Company. We recruit, hire, and promote employees based on their individual ability and experience and in accordance with Affirmative Action and Equal Employment Opportunity laws and regulations. Our policy is that we do not discriminate on the basis of race, color, religion, sex, gender, sexual orientation, ancestry, pregnancy, medical condition, age, martial status, national origin, citizenship status, disability veteran status, gender identity, genetic information, or any other status protected by law.
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The Company is committed to the overall well-being of our team members. In the COVID-19 pandemic, we have worked to implement state and local directives regarding public health. We provided for remote working where possible. We will continue to monitor the COVID-19 pandemic and state guidance, making adjustments as necessary to support employees.
Market Area and Competition
The Bank has four primary market areas across south Louisiana: Acadiana, Baton Rouge, Greater New Orleans, and the Northshore (of Lake Pontchartrain) and, currently, one primary market area in west Mississippi: Natchez. Since completing its initial public offering of stock in October 2008, the Company has acquired five other financial institutions. On December 15, 2021, the Company entered into a definitive agreement to expand into the Houston market with the merger of Friendswood Capital Corporation, the holding company of Texan Bank, N.A. The merger with Friendswood Capital Corporation currently is pending and is expected to be consummated in the first quarter of 2022. The Bank currently operates 19 banking offices in Acadiana, four banking offices in Baton Rouge, six banking offices in the Greater New Orleans area, six banking offices in the Northshore region, and three banking offices in Natchez. In January 2022, we sold the Bank's former branch office in Vicksburg, Mississippi, and transferred approximately $2.8 million in loans and $14.7 million in deposit liabilities from that office. For additional information on our acquisition activity, see Part II, Item 7 in this Annual Report on Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Acquisition Activity.”
We face significant competition in originating loans and attracting deposits. This competition stems primarily from other banks, credit unions and mortgage-banking companies. Many of the financial service providers operating in our market areas are significantly larger and have greater financial resources. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds, mutual funds and from other non-depository financial institutions such as brokerage firms and insurance companies. More recently, innovations in loan and deposit products brought about by financial technology companies have added to the level of competition for originating loans and attracting deposits.
Supervision and Regulation
Set forth below is a brief description of certain laws relating to the regulation of Home Bancorp, Inc. and Home Bank, N.A. This description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.
General. Home Bank, N.A. is subject to federal regulation and oversight by the Office of the Comptroller of the Currency (“OCC”). The Bank is also subject to regulation and examination by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law, and requirements established by the Federal Reserve. In the last several years, the Company has experienced heightened regulatory requirements and scrutiny following the global financial crisis and the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Resulting reforms have caused the Company’s compliance and risk management processes, and the costs thereof, to increase. The legislation enacted in 2018 and summarized below may reduce some of the burdens associated with implementation of the Dodd-Frank Act, but the actual impact of this administration’s policies regarding the Dodd-Frank reforms and the 2018 regulatory reforms is impossible to predict with any certainty.
Federal law provides the federal banking regulators with substantial enforcement powers. The OCC’s enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OCC. The FRB has comparable enforcement authority over the Company. In addition, the FDIC, as the insurer of the Bank’s deposits, can initiate enforcement proceedings, remove Bank officials and suspend or terminate deposit insurance. Any change in such regulations could have a material adverse impact on the Company and the Bank.
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”) was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks, such as the Bank.
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The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent to replace the leverage and risk-based regulatory capital ratios. The Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
Regulation of Home Bancorp, Inc.
The Company is a bank holding company, subject to regulation, supervision and examination by the Federal Reserve. The Federal Reserve has enforcement authority with respect to the Company similar to that of the OCC over the Bank. Applicable federal law and regulations limit the activities of the Company and require the approval of the Federal Reserve for any acquisition of a subsidiary, including another financial institution or holding company thereof, or a merger or acquisition of the Company. The Company must serve as a source of strength for the Bank, maintaining the ability to provide financial assistance if the Bank suffers financial distress. These and other Federal Reserve policies may restrict the Company’s ability to pay dividends. In addition, dividends from the Company may depend, in part, upon its receipt of dividends from the Bank. If the Company does not have the required capital conservation buffer or otherwise meet its new capital requirements, its ability to pay dividends to its stockholders will be limited.
A bank holding company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemption during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with the Federal Reserve. This notification requirement does not apply to any company that meets the well-capitalized standard for bank holding companies, is well-managed and is not subject to any unresolved supervisory issues.
Permissible Activities. The business activities of the Company are generally limited to those activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act and certain additional activities authorized by the Federal Reserve regulations. The Bank Holding Company Act generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company. A bank holding company must obtain Federal Reserve Board approval before acquiring directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares).
Capital Requirements. The regulatory capital requirements generally applicable to a bank holding company are the same as the capital requirements for its subsidiary bank. However, at December 31, 2021, the Company was considered a "small bank holding company" (total consolidated assets of less than $3.0 billion). Small bank holding companies are exempt from any regulatory capital requirements. The Company believes that its capital levels will exceed all regulatory requirements when they become applicable. For a description of the Bank's capital requirements, see “Regulation of Home Bank, N.A. - Recent Regulatory Capital Regulations.”
Federal Securities Laws. We have registered our common stock with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934. Accordingly, the Company is subject to the proxy and tender offer rules, insider trading reporting requirements and restrictions and certain other requirements under the Securities Exchange Act of 1934.
The Sarbanes-Oxley Act. As a public company, the Company is subject to the Sarbanes-Oxley Act of 2002 which addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our principal executive officer and principal financial officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the SEC under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our independent auditors and the Audit
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Committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
Volcker Rule Regulations. Regulations have been adopted by the federal banking agencies to implement the provisions of the Dodd-Frank Act commonly referred to as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of financial institution holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Recently promulgated federal regulations exclude from the Volker Rule restrictions on community banks with $10.0 billion or less in total consolidated assets and total trading assets and liabilities of 5.0% or less of total consolidated assets. The Company qualifies for this exclusion from the Volker Rule restrictions.
Regulation of Home Bank, N.A.
General. The Bank is subject to regulation and oversight by the OCC extending to all aspects of its operations. As part of this authority, the Bank is required to file periodic reports with the OCC and is subject to periodic examinations by the OCC and the FDIC. The investment and lending authorities of national banks are prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations. Such regulation and supervision is primarily intended for the protection of depositors and the Deposit Insurance Fund.
The OCC’s enforcement authority over national banks includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OCC.
Insurance of Accounts. The deposits of the Bank are insured to the maximum extent permitted by the Deposit Insurance Fund and are backed by the full faith and credit of the U.S. government. The Dodd-Frank Act permanently increased deposit insurance on most accounts to $250,000. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against insured institutions.
The Dodd-Frank Act raises the minimum reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% and requires the FDIC to offset the effect of this increase on insured institutions with assets of less than $10 billion (small institutions). In March 2016, the FDIC adopted a rule to accomplish this by imposing a surcharge on larger institutions commencing when the reserve ratio reaches 1.15% and ending when it reaches 1.35%. The reserve ratio reached 1.15% effective as of June 30, 2016. The surcharge period began effective July 1, 2016 and ended on September 30, 2018 when the reserve ratio reached 1.36%. Small institutions received credits for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The credits were applied to reduce regular assessments by 2.0 basis points for quarters when the reserve ratio is at least 1.38%.
Effective July 1, 2016, the FDIC adopted changes that eliminated its risk-based premium system. Under the new premium system, the FDIC assesses deposit insurance premiums on the assessment base of a depository institution, which is its average total assets reduced by the amount of its average tangible equity. For a small institution (one with assets of less than $10 billion) that has been federally insured for at least five years, effective July 1, 2016, the initial base assessment rate ranges from 3 to 30 basis points, based on the institution’s CAMELS composite and component ratings and certain financial ratios; its leverage ratio; its ratio of net income before taxes to total assets; its ratio of nonperforming loans and leases to gross assets; its ratio of other real estate owned to gross assets; its brokered deposits ratio (excluding reciprocal deposits if the institution is well capitalized and has a CAMELS composite rating of 1 or 2); its one year asset growth ratio (which penalizes growth adjusted for mergers in excess of 10%); and its loan mix index (which penalizes higher risk loans based on historical industry charge off rates). The initial base assessment rate is subject to downward adjustment (not below 1.5%) based on the ratio of unsecured debt the institution has issued to its assessment base, and to upward adjustment (which can cause the rate to exceed 30 basis points) based on its holdings of unsecured debt issued by other insured institutions. Institutions with assets of $10 billion or more are assessed using a scorecard method.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the
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institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the Bank’s deposit insurance.
Regulatory Capital Requirements. Current OCC capital standards require these institutions to satisfy a common equity Tier 1 capital requirement, a leverage capital requirement and a risk-based capital requirement. The common equity Tier 1 capital component generally consists of retained earnings and common stock instruments and must equal at least 4.5% of risk-weighted assets. Leverage capital, also known as “core” capital, must equal at least 4.0% of adjusted total assets.. Core capital generally consists of common stockholders’ equity (including retained earnings). Under the risk-based capital requirement, “total” capital (a combination of core and “supplementary” capital) must equal at least 8.0% of “risk-weighted” assets. In addition, in order to make capital distributions and pay discretionary bonuses to executive officers without restriction, an institution must also maintain greater than 2.5% in common equity attributable to a capital conservation buffer. The OCC also is authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.
In determining compliance with the risk-based capital requirement, a national bank is allowed to include both core capital and supplementary capital in its total capital, provided that the amount of supplementary capital included does not exceed the national bank’s core capital. Supplementary capital generally consists of general allowances for loan losses up to a maximum of 1.25% of risk-weighted assets, together with certain other items. In determining the required amount of risk-based capital, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets. The Bank does not have any assets assigned to a risk category over 400%.
National banks must value securities available for sale at amortized cost for regulatory capital purposes. This means that in computing regulatory capital, national banks should add back any unrealized losses and deduct any unrealized gains, net of income taxes, on debt securities reported as a separate component of capital, as defined by generally accepted accounting principles.
At December 31, 2021, the Bank exceeded all of its regulatory capital requirements, with Tier 1, Tier 1 common equity, Tier 1 common equity (to risk-weighted assets) and total risk-based capital ratios of 9.77%, 14.66%, 14.66% and 15.85%, respectively.
Any national bank that fails any of the capital requirements is subject to possible enforcement action by the OCC or the FDIC. Such action could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution’s operations, termination of federal deposit insurance and the appointment of a conservator or receiver. The OCC’s capital regulations provide that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.
Prompt Corrective Action. The following table shows the amount of capital associated with the different capital categories set forth in the prompt corrective action regulations.
| Capital Category | Total Risk-Based Capital | Tier 1 Risk-Based Capital | Tier 1 Common Equity Capital | Tier 1 Leverage Capital | ||||||||||||||||||||||
| Well capitalized | 10% or more | 8% or more | 6.5% or more | 5% or more | ||||||||||||||||||||||
| Adequately capitalized | 8% or more | 6% or more | 4.5% or more | 4% or more | ||||||||||||||||||||||
| Undercapitalized | Less than 8% | Less than 6% | Less than 4.5% | Less than 4% | ||||||||||||||||||||||
| Significantly undercapitalized | Less than 6% | Less than 4% | Less than 3% | Less than 3% | ||||||||||||||||||||||
In addition, an institution is “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the OCC may not reclassify a significantly undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan which meets specified requirements within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or
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disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions.
As of December 31, 2021, the Bank was deemed a well-capitalized institution for purposes of the above regulations and as such is not subject to the above mentioned restrictions.
CARES Act and CAA, 2021. In response to the COVID-19 pandemic, Congress, through the enactment of the CARES Act, and the federal banking agencies, though rulemaking, interpretive guidance and modifications to agency policies and procedures, have taken a series of actions to provide national emergency economic relief measures including, among others, the following:
i.The CARES Act allows banks to elect to suspend requirements under GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a TDR, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. The suspension of GAAP is applicable for the entire term of the modification. The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 by providing that short-term modifications made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification is implemented is not a TDR. The Bank is applying this guidance to qualifying COVID-19 modifications. As of December 31, 2021, the Bank had an aggregate of $3.9 million in outstanding loans that had been modified which, pursuant to this provision of the CARES Act, were not deemed to be TDRs at such date.
ii.The CARES Act amended the SBA’s loan program, in which the Bank participates, to create a guaranteed, unsecured loan program, the PPP, to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during COVID-19. The loans are provided through participating financial institutions, such as the Bank, that process loan applications and service the loans and are eligible for SBA repayment and loan forgiveness if the borrower meets the PPP conditions. The application period for a SBA PPP loan closed on August 8, 2020. The SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders on October 2, 2020. The CAA, 2021, which was signed into law on December 27, 2020, renewed and extended the PPP until March 31, 2021. As a result, as a participating lender, the Bank began originating PPP loans again in January 2021 and will continue to monitor legislative, regulatory, and supervisory developments related to the PPP.
iii.Concurrent with enactment of the CARES Act, federal banking agencies issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The changes in the final rule apply only to those banking organizations that elect the CECL transition relief provided under the rule. The Company did not elect this option.
As the on-going COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation. The Company continues to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic. For additional information regarding actions taken by regulatory agencies to provide relief to consumers who have been adversely impacted by the COVID-19 pandemic, see the discussion below under "Item 1A. Risk Factors—Risks Related to the COVID-19 Pandemic."
Community Reinvestment Act and Fair Lending Laws. All insured depository institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. The Office of the Comptroller of the Currency is required to assess the Bank’s record of compliance with the Community Reinvestment Act. A bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
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discriminating in their lending practices. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as other federal regulatory agencies and the Department of Justice.
On December 14, 2021, the OCC issued a final rule to rescind its June 2020 CRA rule and replace it with a rule based on the rules adopted jointly by the federal banking agencies in 1995, as amended. The final rule aligns the OCC's CRA rule with the rules of the Federal Reserve and the FDIC and thereby, according to the OCC, facilitates the ongoing interagency work to modernize the CRA framework and create consistency for all insured depository institutions.
The Community Reinvestment Act requires all institutions insured by the Federal Deposit Insurance Corporation to publicly disclose their rating. The Bank received a “Outstanding” Community Reinvestment Act rating in its most recent federal examination.
Limitations on Dividends. OCC regulations impose various restrictions on the ability of the Bank to pay dividends. The Bank generally may pay dividends during any calendar year in an amount up to 100% of net income for the year-to-date plus retained net income for the two preceding years, so long as it is well-capitalized after the distribution. If the Bank proposes to pay a dividend when it does not meet its capital requirements or that will exceed these limitations, it must obtain the OCC’s prior approval. The OCC may object to a proposed dividend based on safety and soundness concerns. No insured depository institution may pay a dividend if, after paying the dividend, the institution would be undercapitalized. In addition, as noted above, if Home Bank does not have the required capital conservation buffer, its ability to pay dividends to the Company will be limited.
Limitations on Transactions with Affiliates. Transactions between a national bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a national bank includes any company or entity which controls the national bank or that is controlled by a company that controls the national bank. In a holding company context, the holding company of a national bank (such as the Company) and any companies which are controlled by such holding company are affiliates of the national bank. Generally, Section 23A limits the extent to which the national bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable, to the national bank as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a national bank to an affiliate.
In addition, Sections 22(g) and (h) of the Federal Reserve Act, place restrictions on loans to executive officers, directors and principal shareholders of a national bank and its affiliates. Under Section 22(h), loans to a director, an executive officer, a greater than 10% shareholder of a national bank and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, a national bank’s loans to one borrower limit (generally equal to 15% of the bank’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal shareholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the bank and (ii) does not give preference to any director, executive officer or principal shareholder or certain affiliated interests of either, over other employees of the national bank. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a national bank to all insiders cannot exceed the bank’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. The Bank currently is subject to Sections 22(g) and (h) of the Federal Reserve Act, and as of December 31, 2021 was in compliance with the above restrictions.
Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly with the establishment of the Consumer Financial Protection Bureau (“CFPB”) as part of the Dodd-Frank Act reforms. On July 21, 2011, the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like the Bank, continue to be examined by their applicable bank regulators.
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Anti-money Laundering. All financial institutions, including national banks, are subject to federal laws that are designed to prevent the use of the U.S. financial system to fund terrorist activities. Financial institutions operating in the United States must develop anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs are intended to supplement compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. The Bank has established policies and procedures to ensure compliance with these provisions.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Dallas, which is one of 11 regional FHLBs that administer the home financing credit function of various financial institutions. The FHLBs provides financial institutions additional strength to serve their communities through financial services to support its mission of affordable housing and economic development. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB. As of December 31, 2021, the Bank had $26.0 million of FHLB advances and $810.4 million available on its line of credit with the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB of Dallas in an amount equal to at least 0.4% of its total assets in Class B-1 stock and activity-based investment of Class B-2 stock equal to 4.1% of its advances outstanding and 2.0% of acquired members advances currently on the Bank’s balance sheet. As of December 31, 2021, the Bank had $2.5 million in FHLB stock, which was in compliance with this requirement.
Federal Reserve System. The FRB requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. The required reserves must be maintained in the form of vault cash or an account at the FRB. As of December 31, 2021, the Bank had met its reserve requirement.
Privacy. Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties that market the institutions’ own products and services.
Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing through electronic mail to consumers. The Bank has established policies and procedures designed to safeguard its customers’ personal financial information and to ensure compliance with applicable privacy laws.
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Item 1A. Risk Factors.
In analyzing whether to make or to continue an investment in our securities, investors should consider, among other factors, the following risk factors.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic adversely impacted our business and our customers, employees and third-party service providers. The impacts on our business, operations, financial position and prospects have been and are expected to continue to be significant.
During 2020, the COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. Business and consumer customers of the Bank experienced varying degrees of financial distress, which is expected to continue over coming months and may adversely affect their ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations. During 2021, restrictive measures taken by governments, businesses and individuals eased and the U.S. economy began to improve. With the recent outbreak of the Omicron variant, we may experience additional uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity, which may lead to the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses. Disruptions to our customers’ businesses could also result in declines in, among other things, wealth management revenue. These new developments as a consequence of the pandemic may materially impact our business and the businesses of our customers and may have a material adverse effect on our financial results as the pandemic continues.
Our branch locations are currently open and operating during normal business hours. In order to protect the health of our customers and employees, we continue to take additional precautions within our branch locations, including enhanced cleaning procedures. We may take further actions that we determine are in the best interest of our employees, customers and communities or as may be required by government order. These actions in response to the COVID-19 pandemic, and similar actions by our vendors and business partners, have not materially impaired our ability to support our employees, conduct our business and serve our customers, but there is no assurance that these actions will be sufficient to successfully mitigate the risks presented by COVID-19 or that our ability to operate will not be materially affected going forward. For instance, our business operations may be disrupted if key personnel or significant portions of our employees are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic.
COVID-19 does not yet appear to be contained and the continued outbreak of new variants of COVID-19 could affect significantly more households and businesses. Given the ongoing and dynamic nature of the circumstances, it is not possible to accurately predict the extent, severity or duration of these conditions or when normal economic and operating conditions will resume. For this reason, the extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, the scale of distribution and public acceptance of any vaccines for COVID-19 and the effectiveness of such vaccines in stemming or stopping the spread of COVID-19. The adverse impact on the markets in which we operate and on our business, operations and financial condition is expected to remain elevated until the pandemic subsides.
Risks Related to Our Lending Activities
There are increased risks involved with commercial real estate, including multi-family residential, commercial and industrial and construction and land lending activities.
Our lending activities include loans secured by commercial real estate and commercial and industrial loans. Our multi-family residential loans, commercial and industrial loans and commercial real estate loans increased by an aggregate of 77.6%, 31.8% and 31.1% respectively, from December 31, 2017 through December 31, 2021. Excluding PPP loans, our commercial and industrial loans increased by an aggregate of 8.2% over the same time period. Generally, multi-family residential, commercial and industrial and commercial real estate lending involve a higher degree of risk than single-family residential lending due to a variety of factors. Due to the larger loan balances typically involved in these loans, an adverse development with respect to one loan or one borrower relationship can expose us to greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. As of December 31, 2021, the largest outstanding balances of our multi-family residential, commercial and industrial and commercial real estate loans were $14.5 million, $12.3 million, and $22.6 million respectively. If a large loan were to become non-performing, as we have
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experienced in the past, it can have a significant impact on our results of operations. Because we intend to continue our growth in multi-family residential, commercial and industrial and commercial real estate loans, our credit risk exposure may increase and we may need to make additional provisions to our allowance for loan losses, which could adversely affect our future results of operations.
In addition to commercial real estate and commercial and industrial, and multi-family residential loans, the Bank holds a significant portfolio of construction and land loans. As of December 31, 2021, the Bank’s construction and land loans amounted to $259.7 million, or 14.1% of our loan portfolio. Construction and land loans generally have a higher risk of loss than single-family residential mortgage loans due primarily to the critical nature of the initial estimates of a property’s value upon completion of construction compared to the estimated costs, including interest, of construction as well as other assumptions. If the estimates upon which construction loans are made prove to be inaccurate, we may be confronted with projects that, upon completion, have values which are below the loan amounts. If the Bank is forced to liquidate the collateral associated with such loans at values less than the remaining loan balance, it could have a significant impact on our results of operations.
Risks Related to Market Interest Rates
Changes in interest rates could have a material adverse effect on our operations.
The operations of financial institutions are dependent to a large extent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. Changes in the general level of interest rates can affect our net interest income by affecting the difference between the weighted average yield earned on our interest-earning assets and the weighted average rate paid on our interest-bearing liabilities, or interest rate spread, and the average life of our interest-earning assets and interest-bearing liabilities. If general market rates of interest increase, our interest expense on deposits and borrowings would likely increase which could adversely affect our interest rate spread and net interest income. Changes in interest rates also can affect our ability to originate loans, the value of our interest-earning assets and our ability to realize gains from the sale of such assets, our ability to obtain and retain deposits in competition with other available investment alternatives and the ability of our borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control.
Fluctuations in interest rates due to economic conditions and governmental or regulatory policies may adversely affect our net interest income and profitability.
Interest rates are highly sensitive to many factors beyond the Company’s control, including general economic conditions and the policies of the FRB and other governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the prepayment of loans, the fair value of existing assets and liabilities, the purchase of investments, the retention and generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our earnings could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. We have adopted asset and liability management policies to mitigate the potential adverse effects of changes in interest rates on net interest income or earnings. However, even with these policies in place, a change in interest rates can impact our results of operations or financial condition.
On March 5, 2021, the administrator of LIBOR benchmarks confirmed it would cease the publication of the one week and two-month LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining LIBOR settings immediately following the LIBOR publication on June 30, 2023. We have ceased originating LIBOR-based products effective December 2021 and transitioning all remaining LIBOR based products to an alternative benchmark over the next 18 months. The Company continues to monitor efforts and evaluate the impact of reference rate reform on its consolidated financial statements; however, the impact is not expected to be significant.
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Risks Related to Our Market Areas
Our business is geographically concentrated in south Louisiana and west Mississippi, which are areas where the oil and gas industry has a significant presence. Reductions in prices in crude oil and gas, among other factors, could cause a downturn in the local economy, which could adversely affect the Company’s financial condition and results of operations.
Most of our loans are to individuals and businesses located in south Louisiana and west Mississippi. The oil and gas industry has a significant presence in the market areas in which we operate. Regional economic conditions affect the demand for our products and services as well as the ability of our customers to repay loans. While crude oil prices have rebounded since the Spring of 2020, global markets for oil and gas were disrupted by the COVID-19 pandemic. Continued fluctuations in crude oil prices could adversely affect our operations and economic conditions in some of our markets during 2022 and future periods, which could adversely affect our future results of operations. Although the Company attempts to mitigate risk by diversifying its borrower base, approximately $40.3 million, or 2.2% of the Company’s loan portfolio, at December 31, 2021 was comprised of loans to borrowers in the oil and gas industry (which is also referred to as the “energy sector”). We had an additional $14.6 million in unfunded loan commitments to companies in the energy sector at such date. At December 31, 2021, $1.9 million of our loans in the energy sector were on nonaccrual status, and $827,000 of our total allowance for loan losses was attributable to energy sector loans. Historically, the oil and gas industry has been an important factor in the local economy in our Acadiana and Natchez markets as well as the Houston market that we are entering upon the consummation of our merger with Friendswood Capital Corporation. If oil prices decline, it could have an adverse effect on our customers resulting in increased levels of nonperforming loans, provisions for loan losses and expense associated with loan collection efforts.
A natural disaster, especially one affecting our market areas, could adversely affect the Company’s financial condition and results of operations.
Since a considerable portion of our business is conducted in south Louisiana, most of our credit exposure is in that area. Historically, south Louisiana has been vulnerable to natural disasters, including hurricanes and floods. Natural disasters could harm our operations directly through interference with communications, which would prevent us from gathering deposits, originating loans and processing and controlling our flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. A natural disaster or recurring power outages may also impair the value of our loan portfolio, as uninsured or underinsured losses, including losses from business disruption, may reduce our borrowers’ ability to repay their loans. Disasters may also reduce the value of the real estate securing our loans, impairing our ability to recover on defaulted loans through foreclosure and making it more likely that we would suffer losses on defaulted loans. Although we have implemented several back-up systems and protections (and maintain business interruption insurance), these measures may not protect us fully from the effects of a natural disaster. The occurrence of natural disasters in our market areas could have a material adverse effect on our business, prospects, financial condition and results of operations.
Economic conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.
Prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investment securities and our ongoing operations, costs and profitability. Further, declines in real estate values and sales volumes and elevated unemployment levels may result in higher loan delinquencies, increases in our non-performing and classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations. Reduction in problem assets can be slow, and the process can be exacerbated by the condition of the properties securing non-performing loans and the length of time involved in the foreclosure process. To the extent that we must work through the resolution of assets, economic problems may cause us to incur losses and adversely affect our capital, liquidity and financial condition.
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Risks Related to Accounting Matters
Our allowance for credit losses may not be adequate to cover losses over the life of our financial assets.
On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses, which introduced a new model known as CECL. The new standard significantly changed the impairment model for most financial assets that are measured at amortized cost, including off-balance sheet credit exposures, from an incurred loss model to an expected loss model. We have established an allowance for credit losses, which includes the allowance for loans losses and losses on unfunded lending commitments, based upon various assumptions and judgments about the collectability of our loan portfolio which we believe is adequate to offset expected losses on our existing financial assets. Determining the appropriateness of the allowance requires judgment by management about the effect of matters that are inherently uncertain. Changes in factors and forecasts used in evaluating the overall loan portfolio may result in significant changes in the allowance for credit losses and related provision expense in future periods. The allowance level is influenced by loan volumes, loan asset quality ratings, delinquency status, historical credit loss experience, loan performance characteristics, forecasted information and other conditions influencing loss expectations. Changes to the assumptions in the model in future periods could have a material impact on the Company's Consolidated Financial Statements.
While we are not aware of any specific factors indicating a deficiency in the amount of our allowance for credit losses, in light of the current economic environment, one of the most pressing issues faced by financial institutions is the adequacy of their allowance for credit losses. Federal bank regulators routinely scrutinize the level of the allowance for credit losses maintained by regulated institutions. In the event that we have to increase our allowance for credit losses beyond current levels, it would have an adverse effect on our results in future periods. As of December 31, 2021, our allowance for loan losses amounted to $21.1 million, or 1.15% of total loans and our total allowance for credit losses amounted to $22.9 million, or 1.24% of total loans. See Note 2 to the Consolidated Financial Statements for a detailed discussion of the Company's methodologies for estimating expected credit losses.
Our decisions regarding the fair value of assets acquired could be inaccurate, which could materially and adversely affect our business, financial condition, results of operations and future prospects.
Management makes various assumptions and judgments about the collectability of acquired loan portfolios, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. If our assumptions are incorrect, increased loss reserves may be needed to respond to different economic conditions or adverse developments in the acquired loan portfolio. Any increase in future loan losses would have a negative effect on our operating results.
Declines in the value of our investment securities may require us to take additional charges to earnings.
CECL also requires expected credit related losses for available for sale debt securities to be recorded through an allowance for credit losses, while non-credit related losses will continue to be recognized through other comprehensive income. The Company’s held to maturity debt securities are also required to utilize the CECL approach to estimate expected credit losses.
We evaluate our securities portfolio for impairment at least quarterly, and more frequently when economic and market conditions warrant such evaluations. If this evaluation indicates the existence of credit losses, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost basis, an allowance for credit losses is recorded, limited by the amount that the fair value of the security is less than its amortized cost. Delinquencies and defaults in the mortgage loans underlying these securities may adversely affect the cash flows received by us and may result in a conclusion in future periods that credit losses are expected from our securities portfolio. Such a conclusion, would require us to take additional charges to earnings to establish an allowance for credit losses for these securities.
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Our goodwill may be determined to be impaired at a future date depending on the results of periodic impairment tests.
We test goodwill for impairment annually, or more frequently if necessary. If the quoted market price of our common stock were to decline significantly and the total book value of the Company, including goodwill, exceeded its fair value, we could be required to write down the amount recorded for goodwill. This, in turn, would result in a charge to earnings and, thus, a reduction in shareholders’ equity. See Notes 2 and 8 to the Consolidated Financial Statements for additional information concerning our goodwill and the required impairment test.
Changes in accounting policies or in accounting standards could materially affect how we report our financial condition and results of operations.
Our accounting policies are fundamental to the understanding of our financial condition and results of operations. The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make significant estimates and assumptions that affect the financial statements by affecting the value of our assets or liabilities and results of operations. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because materially different amounts may be reported if different estimates or assumptions were used. If such estimates or assumptions underlying the financial statements are incorrect, we could experience material losses. From time to time, the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards or the interpretation of such standards that govern the preparation of our external financial statements. These changes are beyond our control, can be difficult to predict and could materially impact how we report our financial condition and results of operations. Additionally, it is possible, if unlikely, we could be required to apply a new or revised standard retrospectively, resulting in the restatement of prior period financial statements in material amounts.
Risks Related to Our Business Strategy
We are subject to certain risks in connection with our strategy of growing through mergers and acquisitions.
Mergers and acquisitions are currently a component of our business model and growth strategy. We currently have one merger pending, the acquistion of Friendswood Capital Corporation ("Friendswood") and its wholly-owned subsidiary, Texan Bank, N.A., and it is possible that we could acquire other banking institutions, other financial services companies or branches of banks in the future. Acquisitions typically involve the payment of a premium over book and trading values and, therefore, may result in the dilution of our tangible book value per share. Our ability to engage in future mergers and acquisitions depends on various factors, including: (1) our ability to identify suitable merger partners and acquisition opportunities; (2) our ability to finance and complete transactions on acceptable terms and at acceptable prices; and (3) our ability to receive the necessary regulatory and, when required, shareholder approvals. Our inability to engage in an acquisition or merger for any of these reasons could have an adverse impact on the implementation of our business strategies. Furthermore, mergers and acquisitions involve a number of risks and challenges, including: (1) our ability to achieve planned synergies and to integrate the branches and operations we acquire and the internal controls and regulatory functions into our current operations and (2) the diversion of management’s attention from existing operations, which may adversely affect our ability to successfully conduct our business and negatively impact our financial results.
Our pending merger may be more difficult, costly or time-consuming than expected.
The Company and Friendswood have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger will depend, in part, on our ability to successfully combine the businesses of Home Bancorp and Friendswood upon the completion of the merger. It is possible that the integration process could result in:
•the loss of key employees,
•the disruption of each company's ongoing businesses, or
•inconsistencies in standards, controls, procedures and policies that adversely affect the combined company's ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger.
The loss of key employees could adversely affect the ability of the combined company to successfully conduct businesses in the markets in which Home Bancorp and Friendswood now operate, which could have a material adverse effect on our financial results in future periods. Upon consummation of our pending merger with Friendswood, we will be expanding our operations into Texas for the first time and Friendswood’s market area in Houston. No assurance can be given that we will be able to successfully transfer the business model and operations that we have utilized in our Louisiana markets to our
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proposed new market areas in Houston. In addition, if the combined company experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause us, Friendswood and/or the combined company to lose customers or cause customers to remove their accounts from the Bank and/or move their business to competing financial institutions. These integration matters could have a material adverse effect on the Company during the transition period and for an undetermined period after consummation of the merger.
The combined company may fail to realize cost savings for the merger.
Although we expect to realize cost savings from our pending merger with Friendswood when the merger integration is fully phased in, it is possible that these potential cost savings may not be realized fully or realized at all, or may take longer to realize than expected. For example, future business developments may require the combined company to continue to operate or maintain some facilities or support functions that are currently expected to be combined or reduced. Cost savings also depend on the combined company’s ability to combine the businesses of Home Bancorp and Friendswood in a manner that permits those costs savings to be realized. If we are not able to combine the two companies successfully, these anticipated cost savings may not be fully realized or realized at all, or may take longer to realize than expected. This in turn could reduce or otherwise adversely affect the profitability of the combined company and adversely affect our stock price.
Our financial performance and future growth may be negatively affected if we are unable to successfully execute our growth plans, which may include additional acquisitions.
Over the past several years, we have grown our branch system primarily through acquisitions of other financial institutions. Our ability to successfully acquire other institutions depends on our ability to identify, acquire and integrate such institutions into our franchise. Our results of operations could be adversely affected if our analysis of pending or future acquisitions was not complete and correct or our integration efforts were not successful. Currently, other than our pending Agreement and Plan of Merger with Friendswood Capital Corporation, we have no agreements or understandings with anyone regarding a future acquisition.
Risks Related to Our Operational and Information Technology Systems
A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our businesses, result in the unauthorized disclosure of confidential information, damage our reputation and cause financial losses.
Our ability to adequately conduct and grow our business is dependent on our ability to create and maintain an appropriate operational and organizational control infrastructure. Operational risk can arise in numerous ways including employee fraud, customer fraud and control lapses in bank operations and information technology. Our dependence on our employees and automated systems, including the automated systems used by acquired entities and third parties, to record and process transactions may further increase the risk that technical failures or tampering of those systems will result in losses that are difficult to detect. We are also subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control. Failure to maintain an appropriate operational infrastructure can lead to loss of service to customers, legal actions and noncompliance with various laws and regulations.
We continuously monitor our operational and technological capabilities and make modifications and improvements when we believe it will be cost effective to do so. In some instances, we may build and maintain these capabilities ourselves. We also outsource some of these functions to third parties. These third parties may experience errors or disruptions that could adversely impact us and over which we may have limited control. We also face risk from the integration of new infrastructure platforms and/or new third party providers of such platforms into its existing businesses.
System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.
We rely heavily on communications and information systems to conduct our business. The computer systems and network infrastructure we use could be vulnerable to unforeseen hardware and cybersecurity issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure we use, including our internet banking activities, against damage from physical break-ins, cybersecurity breaches and other disruptive problems caused by the internet or users. Such problems could jeopardize the security of our customers’ personal information and other information stored in and transmitted through our
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computer systems and network infrastructure, which may result in significant liability to us, subject us to additional regulatory scrutiny, damage our reputation, result in a loss of customers or inhibit current and potential customers from our internet banking services. Any or all of these problems could have a material adverse effect on our results of operations and financial condition. Although we have security measures, including firewalls and penetration tests, designed to mitigate the possibility of break-ins, breaches and other disruptive problems, there can be no assurance that such security measures will be effective in preventing such problems.
We are dependent on our information technology and telecommunications systems and third-party service providers; systems failures, interruptions and cybersecurity breaches could have a material adverse effect on us.
Our business is dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party service providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us.
Our third-party service providers may be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We likely will expend additional resources to protect against the threat of such security breaches and computer viruses, or to alleviate problems caused by such security breaches or viruses. To the extent that the activities of our third-party service providers or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation costs and other possible liabilities.
The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
As a bank, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our customers, which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our customers, denial or degradation of service attacks and malware or other cyber-attacks. In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our customers may have been affected by these breaches, which could increase their risks of identity theft and other fraudulent activity that could involve their accounts with us.
Information pertaining to us and our customers is maintained, and transactions are executed, on networks and systems maintained by us and certain third-party partners, such as our online banking, mobile banking or accounting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our customers against fraud and security breaches and to maintain the confidence of our customers. Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or the confidential information of our customers, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and protect data about us, our customers and underlying transactions, as well as the technology used by our customers to access our systems. Our third-party partners’ inability to anticipate, or failure to adequately mitigate, breaches of security could result in a number of negative events, including losses to us or our customers, loss of business or customers, damage to our reputation, the incurrence of additional expenses, disruption to our business, additional regulatory scrutiny, penalties or exposure to civil litigation and possible financial
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liability, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Risks Related to Our Business and Industry Generally
We face strong competition which adversely affects our profitability.
We are subject to vigorous competition in all aspects and areas of our business from banks and other financial institutions. We are significantly smaller than several of the larger depository institutions operating in our market areas. The financial resources of these larger competitors may permit them to pay higher interest rates on their deposits and to be more aggressive in new loan originations. We also compete with non-financial institutions, including retail stores that maintain their own credit programs, governmental agencies that make available low cost or guaranteed loans to certain borrowers and non-traditional financial technology firms that are offering an increasing array of online loan, deposit and treasury management products. Some of our larger competitors have substantially greater resources, technological capabilities, lending limits, branch systems and a wider array of commercial banking services. Vigorous competition from both bank and non-bank organizations is expected to continue.
We operate in a highly regulated environment, and we may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by the FRB, the OCC and the FDIC. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of the Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We currently conduct business from 19 banking offices in Acadiana, four banking offices in Baton Rouge, six banking offices in Greater New Orleans, six banking offices in the Northshore (of Lake Pontchartrain) region of Louisiana and three banking offices in Natchez, Mississippi. The Bank owns 34 of its 38 banking offices. The Bank leases the land for one banking office in our Northshore market, and leases one banking office in Acadiana, Baton Rouge, Mississippi and Greater New Orleans, respectively.
Item 3. Legal Proceedings.
From time-to-time, the Bank is named as a defendant in various legal actions arising from the normal course of business in which damages of various amounts may be claimed. While the amount, if any, of ultimate liability with respect to any such matters cannot be currently determined, management believes, after consulting with legal counsel, that any such liability will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a)Home Bancorp, Inc.’s common stock is listed on the Nasdaq Global Select Market under the symbol “HBCP”. The common stock commenced trading on the Nasdaq Stock Market on October 3, 2008. As of the close of business on December 31, 2021, there were 8,526,907 shares of common stock outstanding, held by approximately 654 shareholders of record, not including the number of persons or entities whose stock is held in nominee or “street” name through various brokerage firms and banks.
The following graph shows a comparison of the cumulative total returns for the common stock of Home Bancorp, Inc., the Nasdaq Composite Index, and the S&P US Small Cap Banks Index for the period beginning December 31, 2016 and ending December 31, 2021. The graph below represents $100 invested in our common stock at its closing price on December 31, 2016.
| Period Ending | ||||||||||||||||||||||||||||||||||||||
| Index | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | ||||||||||||||||||||||||||||||||
| Home Bancorp, Inc. | 100.00 | 113.58 | 94.60 | 107.15 | 79.06 | 120.15 | ||||||||||||||||||||||||||||||||
| NASDAQ Composite | 100.00 | 128.24 | 123.26 | 166.68 | 239.42 | 290.63 | ||||||||||||||||||||||||||||||||
| S&P US Small Cap Banks | 100.00 | 104.33 | 87.06 | 109.22 | 99.19 | 138.09 | ||||||||||||||||||||||||||||||||
The stock price information shown above is not necessarily indicative of future price performance. Information used was obtained from S&P Global Market Intelligence, Charlottesville, Virginia. The Company assumes no responsibility for any errors or omissions in such information.
The Company did not sell any of its equity securities during 2021 that were not registered under the Securities Act of 1933.
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(b)Not applicable.
(c)On October 26, 2021, the Company announced the approval of a new repurchase program (the "2021 Repurchase Plan"). Under the 2021 Repurchase Plan, the Company may purchase up to 430,000 shares, or approximately 5% of its common stock outstanding, through open market or privately negotiated transactions. Shares repurchases under the 2021 Repurchase Plan may commence upon the completion of the Company's 2020 Repurchase Plan. There are 54,068 shares remaining that may be repurchased under the 2020 Repurchase Plan. The Company’s purchases of its common stock made during the fourth quarter of 2021 (which were made pursuant to the 2020 Repurchase Plan) are set forth in the following table.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| October 1 - October 31, 2021 | — | $ | — | — | 486,583 | |||||||||||||||||||||
| November 1 - November 30, 2021 | — | — | — | 486,583 | ||||||||||||||||||||||
| December 1 - December 31, 2021 | 2,515 | 40.64 | 2,515 | 484,068 | ||||||||||||||||||||||
| Total | 2,515 | $ | 40.64 | 2,515 | 484,068 | |||||||||||||||||||||
Item 6. Reserved.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is an analysis and discussion of the financial condition and results of operations of Home Bancorp, Inc. (the “Company”), and its wholly owned subsidiary, Home Bank, N.A. (the “Bank”). This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related notes included herein in Part II, Item 8, “Financial Statements and Supplementary Data” and the description of our business included herein in Part 1, Item 1 “Business”.
EXECUTIVE OVERVIEW
The Company reported net income for 2021 of $48.6 million, or $5.77 diluted EPS compared to $24.8 million, or $2.85 diluted EPS, reported for 2020. Our 2021 results reflect a $10.2 million reversal of reserve builds made in 2020 primarily due to improvements in our assessment of the economic impact of the COVID-19 pandemic.
Highlights of the Company’s performance for the year ended December 31, 2021 are summarized below.
•Assets increased $346.4 million, or 13.4%, from December 31, 2020 to $2.9 billion at December 31, 2021.
•Loans decreased by $139.9 million, or 7.1%, from December 31, 2020 to $1.8 billion at December 31, 2021. Excluding PPP loans, loans increased by $37.7 million, or 2.1%.
•During the year ended December 31, 2021, the Company reversed $10.2 million of the allowance for loan losses compared to $12.7 million provisioned for the year ended December 31, 2020. This reversal was primarily due to improvements in our assessment of the economic impact of the COVID-19 pandemic.
•The ALL totaled $21.1 million, or 1.15% of total loans, at December 31, 2021. The ACL, which is comprised of the allowance for loan losses plus the allowance for unfunded lending commitments, totaled $22.9 million, or 1.24% of total loans at December 31, 2021. Excluding PPP loans, the ratios of ALL to total loans and ACL to total loans were 1.17% and 1.27%, respectively.
•Total deposits increased $322.0 million, or 14.5%, from December 31, 2020 to $2.5 billion at December 31, 2021 primarily due to increases in demand deposit and NOW accounts.
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•The Company repurchased 246,012 shares of common stock at an average price of $36.18 per share.
•The net interest margin was 3.88% for the year ended December 31, 2021, down 8 bps compared to 2020, primarily due to a decrease in the average yield earned on interest-earning assets during 2021.
•Loan income from the recognition of deferred PPP lender fees increased $7.3 million, or 178.8% from December 31, 2020 to $11.4 million at December 31, 2021.
•The average rate paid on total interest-bearing deposits during 2021 was 0.32%, down 40 bps compared to 2020.
•Noninterest income increased $2.0 million, or 13.7%, in 2021 compared to 2020 primarily due to the receipt of non-taxable life insurance proceeds of $1.7 million from a BOLI policy following the death of an employee in 2021.
•Noninterest expense increased $4.0 million, or 6.4%, in 2021 compared to 2020. Increases across several noninterest expense categories (including, but not limited to, compensation, data processing, marketing, provision for credit losses on unfunded commitments and other expenses) were partially offset by decreases in amortization of acquisition intangibles, foreclosed assets, and regulatory fees.
SELECTED FINANCIAL DATA
Set forth below is selected summary historical financial and other data of the Company. When you read this summary historical financial data, it is important that you also read the historical financial statements and related notes contained in Item 8 of this Form 10-K. Taxable equivalent (“TE”) ratios have been calculated using a marginal tax rate of 21%.
| As of December 31, | ||||||||||||||||||||||||||||||||
(dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Selected Financial Condition Data: | ||||||||||||||||||||||||||||||||
| Total assets | $ | 2,938,244 | $ | 2,591,850 | $ | 2,200,465 | $ | 2,153,658 | $ | 2,228,121 | ||||||||||||||||||||||
| Cash and cash equivalents | 601,443 | 187,952 | 39,847 | 59,618 | 150,418 | |||||||||||||||||||||||||||
| Interest-bearing deposits in banks | 349 | 349 | 449 | 939 | 2,421 | |||||||||||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||||||||||
| Available for sale | 327,632 | 254,752 | 257,321 | 260,131 | 234,993 | |||||||||||||||||||||||||||
| Held to maturity | 2,102 | 2,934 | 7,149 | 10,872 | 13,034 | |||||||||||||||||||||||||||
| Loans receivable, net | 1,819,004 | 1,946,991 | 1,696,493 | 1,633,406 | 1,642,988 | |||||||||||||||||||||||||||
| Intangible assets | 61,949 | 63,112 | 64,472 | 66,055 | 68,033 | |||||||||||||||||||||||||||
| Deposits | 2,535,849 | 2,213,821 | 1,820,975 | 1,773,217 | 1,866,227 | |||||||||||||||||||||||||||
| Other borrowings | 5,539 | 5,539 | 5,539 | 5,539 | — | |||||||||||||||||||||||||||
| Federal Home Loan Bank advances | 26,046 | 28,824 | 40,620 | 58,698 | 71,825 | |||||||||||||||||||||||||||
| Shareholders’ equity | 351,903 | 321,842 | 316,329 | 304,040 | 277,871 | |||||||||||||||||||||||||||
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| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| (dollars in thousands, except per share data) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Selected Operating Data: | ||||||||||||||||||||||||||||||||
| Interest income | $ | 106,902 | $ | 104,129 | $ | 102,208 | $ | 102,312 | $ | 74,398 | ||||||||||||||||||||||
| Interest expense | 5,913 | 11,918 | 16,212 | 10,306 | 6,549 | |||||||||||||||||||||||||||
| Net interest income | 100,989 | 92,211 | 85,996 | 92,006 | 67,849 | |||||||||||||||||||||||||||
| Provision for loan losses | (10,161) | 12,728 | 3,014 | 3,943 | 2,317 | |||||||||||||||||||||||||||
| Net interest income after provision for loan losses | 111,150 | 79,483 | 82,982 | 88,063 | 65,532 | |||||||||||||||||||||||||||
| Noninterest income | 16,271 | 14,305 | 14,415 | 13,447 | 9,962 | |||||||||||||||||||||||||||
| Noninterest expense | 66,982 | 62,981 | 63,605 | 63,225 | 46,177 | |||||||||||||||||||||||||||
| Income before income taxes | 60,439 | 30,807 | 33,792 | 38,285 | 29,317 | |||||||||||||||||||||||||||
| Income taxes | 11,818 | 6,042 | 5,860 | 6,695 | 12,493 | |||||||||||||||||||||||||||
| Net income | $ | 48,621 | $ | 24,765 | $ | 27,932 | $ | 31,590 | $ | 16,824 | ||||||||||||||||||||||
| Earnings per share - basic | $ | 5.80 | $ | 2.86 | $ | 3.08 | $ | 3.48 | $ | 2.36 | ||||||||||||||||||||||
| Earnings per share - diluted | $ | 5.77 | $ | 2.85 | $ | 3.05 | $ | 3.40 | $ | 2.28 | ||||||||||||||||||||||
| Cash dividends per share | $ | 0.91 | $ | 0.88 | $ | 0.84 | $ | 0.71 | $ | 0.55 | ||||||||||||||||||||||
| As of or For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||
Selected Operating Ratios: (1) | ||||||||||||||||||||||||||||||||
Average yield on interest-earning assets(TE) | 4.11 | % | 4.48 | % | 5.07 | % | 5.15 | % | 4.91 | % | ||||||||||||||||||||||
| Average rate on interest-bearing liabilities | 0.35 | 0.76 | 1.13 | 0.73 | 0.59 | |||||||||||||||||||||||||||
Average interest rate spread(TE)(2) | 3.76 | 3.72 | 3.94 | 4.42 | 4.32 | |||||||||||||||||||||||||||
Net interest margin(TE)(3) | 3.88 | 3.96 | 4.26 | 4.62 | 4.48 | |||||||||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 152.48 | 146.05 | 140.07 | 139.72 | 135.70 | |||||||||||||||||||||||||||
Noninterest expense to average assets | 2.42 | 2.53 | 2.89 | 2.93 | 2.86 | |||||||||||||||||||||||||||
Efficiency ratio(4) | 57.12 | 59.13 | 63.34 | 59.96 | 59.35 | |||||||||||||||||||||||||||
Return on average assets | 1.76 | 0.99 | 1.27 | 1.46 | 1.04 | |||||||||||||||||||||||||||
Return on average common equity | 14.38 | 7.83 | 8.95 | 10.88 | 8.63 | |||||||||||||||||||||||||||
Return on average tangible common equity (Non-GAAP)(8) | 17.98 | 10.24 | 11.83 | 14.80 | 9.66 | |||||||||||||||||||||||||||
Common stock dividend payout ratio | 15.77 | 30.88 | 27.54 | 20.88 | 24.12 | |||||||||||||||||||||||||||
Average equity to average assets | 12.22 | 12.69 | 14.19 | 13.43 | 12.06 | |||||||||||||||||||||||||||
Book value per common share | $ | 41.27 | $ | 36.82 | $ | 34.19 | $ | 32.14 | $ | 29.57 | ||||||||||||||||||||||
Tangible book value per common share (Non-GAAP)(9) | 34.00 | 29.60 | 27.22 | 25.16 | 22.33 | |||||||||||||||||||||||||||
Asset Quality Ratios: (5) (6) | ||||||||||||||||||||||||||||||||
| Non-performing loans as a percent of total loans receivable | 0.72 | % | 0.61 | % | 1.17 | % | 1.40 | % | 2.38 | % | ||||||||||||||||||||||
| Non-performing assets as a percent of total assets | 0.49 | 0.95 | 0.95 | 0.97 | 1.49 | |||||||||||||||||||||||||||
| Allowance for loan losses as a percent of non-performing loans as of end of period | 158.9 | 110.0 | 110.0 | 96.6 | 63.9 | |||||||||||||||||||||||||||
| Allowance for loan losses as a percent of net loans as of end of period | 1.15 | 1.29 | 1.29 | 1.36 | 1.52 | |||||||||||||||||||||||||||
Capital Ratios: (5) (7) | ||||||||||||||||||||||||||||||||
Tier 1 risk-based capital ratio | 14.66 | % | 13.92 | % | 14.22 | % | 14.55 | % | 12.54 | % | ||||||||||||||||||||||
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| As of or For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||
Leverage capital ratio | 9.77 | 9.68 | 11.17 | 11.15 | 11.66 | |||||||||||||||||||||||||||
Total risk-based capital ratio | 15.85 | 15.18 | 15.28 | 15.59 | 13.48 | |||||||||||||||||||||||||||
(1)With the exception of end-of-period ratios, all ratios are based on average monthly balances during the respective periods.
(2)Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.
(3)Net interest margin represents net interest income as a percentage of average interest-earning assets. Taxable equivalent yields are calculated using a marginal tax rate of 21% for the years ended December 31, 2021, 2020, 2019 and 2018 and 35% for the year ended December 31, 2017.
(4)The efficiency ratio represents noninterest expense as a percentage of total revenues. Total revenues is the sum of net interest income and noninterest income.
(5)Asset quality and capital ratios are end of period ratios.
(6)Due to the adoption of ASC 326, asset quality ratios are based on total non-performing assets at December 31, 2021. For the periods prior to January 1, 2020, asset quality ratios represent originated non-performing assets. Acquired nonimpaired loans, which were on nonaccrual or 90 days or more past due, and acquired assets, which were foreclosed assets or ORE, are not included for periods prior to January 1, 2020. Acquired nonimpaired loans, which were on nonaccrual or 90 days or more past due totaled $8.7 million, $9.8 million, $9.0 million and $2.7 million at December 31, 2020, 2019, 2018 and 2017, respectively. Acquired assets, which were foreclosed assets or ORE, totaled $880,000, $2.4 million, $1.4 million and $584,000, at December 31, 2020, 2019, 2018 and 2017, respectively. Refer to Note 2 to the Consolidated Financial Statements for more information on the adoption of ASC 326.
(7)Capital ratios are for Home Bank only.
(8)Tangible calculation eliminates goodwill, core deposit intangible and the corresponding amortization expense, net of tax.
(9)Tangible calculation eliminates goodwill and core deposit intangible.
This Selected Financial Data contains financial information prepared other than in accordance with generally accepted accounting principles (“GAAP”). The Company uses these non-GAAP financial measures in its analysis of the Company’s performance. Management believes that the non-GAAP information provides useful data in understanding the Company’s operations and in comparing the Company’s results to peers. This non-GAAP information should be considered in addition to the Company’s financial information prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. A reconciliation of GAAP to non-GAAP disclosures is included in the table below.
Non-GAAP Reconciliation
| As of or For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| (dollars in thousands, except per share data) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Book value per common share | $ | 41.27 | $ | 36.82 | $ | 34.19 | $ | 32.14 | $ | 29.57 | ||||||||||||||||||||||
| Less: Intangibles | 7.27 | 7.22 | 6.97 | 6.98 | 7.24 | |||||||||||||||||||||||||||
| Tangible book value per common share | 34.00 | 29.60 | 27.22 | 25.16 | 22.33 | |||||||||||||||||||||||||||
| Net Income | 48,621 | 24,765 | 27,932 | 31,590 | 16,824 | |||||||||||||||||||||||||||
| Add: CDI amortization, net of tax | 919 | 1,074 | 1,250 | 1,458 | 496 | |||||||||||||||||||||||||||
| Non-GAAP tangible income | 49,540 | 25,839 | 29,182 | 33,048 | 17,320 | |||||||||||||||||||||||||||
| Return on common equity | 14.38 | % | 7.83 | % | 8.95 | % | 10.88 | % | 8.63 | % | ||||||||||||||||||||||
| Add: Intangibles | 3.60 | 2.41 | 2.88 | 3.92 | 1.03 | |||||||||||||||||||||||||||
Return on average tangible common equity | 17.98 | 10.24 | 11.83 | 14.80 | 9.66 | |||||||||||||||||||||||||||
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COVID-19 RESPONSE
Mississippi's COVID-19 restrictions were lifted during the first quarter of 2021. After an increase in COVID-19 cases during the third quarter of 2021, Louisiana reinstituted its indoor mask mandate in August 2021. The mask mandate was lifted in October 2021 but was reinstituted in the city of New Orleans in January 2022.
Under the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"), the Company funded approximately 4,875 PPP loans totaling $388.7 million during 2020 and 2021, in aggregate. At December 31, 2021, the total recorded net investment in PPP loans was $43.6 million, of which approximately 177 loans with an aggregate outstanding balance of $5.0 million were for amounts of $150,000 or less.
To give immediate financial support to our customers, the Company began providing principal and/or interest payment relief options in March 2020. When we last reported the level of such deferrals in our third quarter Form 10-Q (as of September 30, 2021), $4.5 million, or less than 1% of total loans, were under deferral agreements. As of December 31, 2021, the level of deferrals decreased to $3.9 million, or less than 1% of total loans. The level of COVID-19 related deferrals formerly totaled $558.8 million, or 28% of total loans, at June 30, 2020. Of the loans that have exited deferral agreements, $372.6 million, or 99%, were current and performing as of December 31, 2021.
CRITICAL ACCOUNTING ESTIMATES
SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. Our accounting policies are discussed in detail in Note 2 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, management believes the policy noted below meets the SEC’s definition of a critical accounting policy.
Allowance for Credit Losses
Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in our portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and industry loan concentrations, changes in the volume and severity of nonperforming assets, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis.
22
ACQUISITION ACTIVITY
The Company has completed five acquisitions since 2010. The following table is a summary of the Company’s acquisition activity as recorded.
SUMMARY OF ACQUISITION ACTIVITY
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
| Acquisition | Acquisition Date | Total Assets | Total Loans | Goodwill | Core Deposit Intangible | Total Deposits | ||||||||||||||||||||||||||||||||
| Statewide Bank | 3/12/2010 | $ | 188,026 | $ | 110,415 | $ | 560 | $ | 1,429 | $ | 206,925 | |||||||||||||||||||||||||||
| GS Financial Corporation | 7/15/2011 | 256,677 | 182,440 | 296 | 859 | 193,518 | ||||||||||||||||||||||||||||||||
| Britton & Koontz Capital Corporation | 2/14/2014 | 298,930 | 161,581 | 43 | 3,030 | 216,600 | ||||||||||||||||||||||||||||||||
| Louisiana Bancorp, Inc. | 9/15/2015 | 352,897 | 281,583 | 8,454 | 1,586 | 208,670 | ||||||||||||||||||||||||||||||||
| St. Martin Bancshares, Inc. | 12/6/2017 | 592,852 | 439,872 | 49,135 | 6,766 | 533,497 | ||||||||||||||||||||||||||||||||
| Total Acquisitions | $ | 1,689,382 | $ | 1,175,891 | $ | 58,488 | $ | 13,670 | $ | 1,359,210 | ||||||||||||||||||||||||||||
We expect our pending acquisition of Friendswood Capital Corporation and its wholly owned subsidiary, Texan Bank, N.A., to be consummated in the first quarter of 2022.
FINANCIAL CONDITION
Loans, Allowance for Credit Losses and Asset Quality
Loans
The types of loans originated by the Company are subject to federal and state laws and regulations. Interest rates charged on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by our competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the FRB, legislative tax policies and governmental budgetary matters.
The Company’s lending activities are subject to underwriting standards and loan origination procedures established by our Board of Directors and management. Loan originations are obtained through a variety of sources, primarily existing customers as well as new customers obtained from referrals and local advertising and promotional efforts. Single-family residential mortgage loan applications and consumer loan applications are taken at any of the Bank’s branch offices. Applications for other loans typically are taken personally by one of our loan officers, although they may be received by a branch office initially and then referred to a loan officer. All loan applications are processed and underwritten centrally at the Bank’s main office.
Total loans in portfolio (which does not include mortgage loans held for sale) decreased $139.9 million, or 7.1%, from December 31, 2020 to $1.8 billion at December 31, 2021. At December 31, 2021, the total recorded net investment in PPP loans was $43.6 million, which are included in commercial and industrial loans. The recorded investment in PPP loans is net of $1.3 million in deferred lender fees, which will be amortized into interest income over the life of the loans. Excluding PPP loans, total loans increased by $37.7 million, or 2.1%.
The following table summarizes the composition of the Company’s loan portfolio as of the dates indicated.
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| December 31, | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||
One- to four-family first mortgage | $ | 350,843 | $ | 395,638 | $ | 430,820 | $ | 450,363 | $ | 477,211 | ||||||||||||||||||||||
| Home equity loans and lines | 60,312 | 67,700 | 79,812 | 83,976 | 94,445 | |||||||||||||||||||||||||||
| Commercial real estate | 801,624 | 750,623 | 722,807 | 640,575 | 611,358 | |||||||||||||||||||||||||||
| Construction and land | 259,652 | 221,823 | 195,748 | 193,597 | 177,263 | |||||||||||||||||||||||||||
| Multi-family residential | 90,518 | 87,332 | 54,869 | 54,455 | 50,978 | |||||||||||||||||||||||||||
| Total real estate loans | 1,562,949 | 1,523,116 | 1,484,056 | 1,422,966 | 1,411,255 | |||||||||||||||||||||||||||
| Other loans: | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 244,123 | 417,926 | 184,701 | 172,934 | 185,284 | |||||||||||||||||||||||||||
| Consumer | 33,021 | 38,912 | 45,604 | 53,854 | 61,256 | |||||||||||||||||||||||||||
| Total other loans | 277,144 | 456,838 | 230,305 | 226,788 | 246,540 | |||||||||||||||||||||||||||
| Total loans | $ | 1,840,093 | $ | 1,979,954 | $ | 1,714,361 | $ | 1,649,754 | $ | 1,657,795 | ||||||||||||||||||||||
The following table reflects contractual loan maturities as of December 31, 2021, unadjusted for scheduled principal reductions, prepayments, or repricing opportunities. The table also reflects the portion of loans due after one year that have fixed or variable interest rates.
| Amounts as of December 31, 2021 which mature in: | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | One year or less | After one, but within five years | After five but within fifteen years | After fifteen years | Total | |||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 39,322 | $ | 107,263 | $ | 83,353 | $ | 120,905 | $ | 350,843 | ||||||||||||||||||||||
| Home equity loans and lines | 1,266 | 13,976 | 13,297 | 31,773 | 60,312 | |||||||||||||||||||||||||||
| Commercial real estate | 107,792 | 359,111 | 285,850 | 48,871 | 801,624 | |||||||||||||||||||||||||||
| Construction and land | 148,860 | 59,391 | 29,429 | 21,972 | 259,652 | |||||||||||||||||||||||||||
| Multi-family residential | 24,947 | 49,681 | 9,451 | 6,439 | 90,518 | |||||||||||||||||||||||||||
| Commercial and industrial | 85,125 | 131,266 | 27,732 | — | 244,123 | |||||||||||||||||||||||||||
| Consumer | 4,267 | 11,045 | 14,152 | 3,557 | 33,021 | |||||||||||||||||||||||||||
| Total | $ | 411,579 | $ | 731,733 | $ | 463,264 | $ | 233,517 | $ | 1,840,093 | ||||||||||||||||||||||
| Loans with fixed interest rates: | ||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 102,393 | $ | 66,510 | $ | 58,644 | $ | 227,547 | ||||||||||||||||||||||||
| Home equity loans and lines | 956 | 5,617 | 36 | 6,609 | ||||||||||||||||||||||||||||
| Commercial real estate | 321,505 | 218,773 | 22,295 | 562,573 | ||||||||||||||||||||||||||||
| Construction and land | 35,713 | 14,542 | 3,357 | 53,612 | ||||||||||||||||||||||||||||
| Multi-family residential | 48,052 | 7,327 | 5,159 | 60,538 | ||||||||||||||||||||||||||||
| Commercial and industrial | 93,495 | 25,426 | — | 118,921 | ||||||||||||||||||||||||||||
| Consumer | 8,465 | 13,942 | 3,277 | 25,684 | ||||||||||||||||||||||||||||
| Total | $ | 610,579 | $ | 352,137 | $ | 92,768 | $ | 1,055,484 | ||||||||||||||||||||||||
| Loans with variable interest rates: | ||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 4,870 | $ | 16,843 | $ | 62,261 | $ | 83,974 | ||||||||||||||||||||||||
| Home equity loans and lines | 13,020 | 7,680 | 31,737 | 52,437 | ||||||||||||||||||||||||||||
| Commercial real estate | 37,606 | 67,077 | 26,576 | 131,259 | ||||||||||||||||||||||||||||
| Construction and land | 23,678 | 14,887 | 18,615 | 57,180 | ||||||||||||||||||||||||||||
| Multi-family residential | 1,629 | 2,124 | 1,280 | 5,033 | ||||||||||||||||||||||||||||
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| Amounts as of December 31, 2021 which mature in: | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | One year or less | After one, but within five years | After five but within fifteen years | After fifteen years | Total | |||||||||||||||||||||||||||
| Commercial and industrial | 37,771 | 2,306 | — | 40,077 | ||||||||||||||||||||||||||||
| Consumer | 2,580 | 210 | 280 | 3,070 | ||||||||||||||||||||||||||||
| Total | $ | 121,154 | $ | 111,127 | $ | 140,749 | $ | 373,030 | ||||||||||||||||||||||||
Allowance for Credit Losses
Effective January 1, 2020, the Company adopted the guidance under ASC 326, which introduced a new model known as CECL. For reporting periods beginning on and after January 1, 2020 and the adoption of ASC 326, the ACL is maintained at level that reflects expected losses for the full life of the financial assets. Prior to January 1, 2020 and the adoption of ASC 326, the ALL was maintained at an amount which management determined covered reasonably estimable and probable losses. The day one impact of the change in accounting principle is reflected in the table below as an increase to the beginning balance in 2020. Management recalculates the ACL at least quarterly to reassess the estimate of credit losses for the total portfolio at the relevant reporting date. For more information on the adoption of ASC 326 and the Company's relevant accounting policies, refer to Note 2 of the Consolidated Financial Statements.
The following table presents the activity in the allowance for credit losses for the years indicated.
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | 32,963 | $ | 17,868 | $ | 16,348 | $ | 14,807 | $ | 12,511 | ||||||||||||||||||||||
| ASC 326 adoption impact | — | 4,633 | — | — | — | |||||||||||||||||||||||||||
| Provision for loan losses | (10,161) | 12,728 | 3,014 | 3,943 | 2,317 | |||||||||||||||||||||||||||
| Loans charged off: | ||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | (176) | (99) | (4) | (1) | (29) | |||||||||||||||||||||||||||
| Home equity loans and lines | (6) | (575) | (42) | — | (10) | |||||||||||||||||||||||||||
| Commercial real estate | (1,337) | (5) | (360) | — | (3) | |||||||||||||||||||||||||||
| Construction and land | — | (688) | (6) | — | — | |||||||||||||||||||||||||||
| Multi-family residential | — | — | — | — | — | |||||||||||||||||||||||||||
| Commercial and industrial | (599) | (984) | (893) | (2,506) | (358) | |||||||||||||||||||||||||||
| Consumer | (187) | (250) | (272) | (74) | (64) | |||||||||||||||||||||||||||
| Recoveries on charged off loans | 592 | 335 | 83 | 179 | 443 | |||||||||||||||||||||||||||
| Ending balance - allowance for loan losses | $ | 21,089 | $ | 32,963 | $ | 17,868 | $ | 16,348 | $ | 14,807 | ||||||||||||||||||||||
| Allowance for unfunded lending commitments: | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | 1,425 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| ASC 326 adoption impact | — | 1,425 | — | — | — | |||||||||||||||||||||||||||
| Provision for losses on unfunded commitments | 390 | — | — | — | — | |||||||||||||||||||||||||||
| Ending balance - allowance for unfunded commitments | 1,815 | 1,425 | — | — | — | |||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 22,904 | $ | 34,388 | $ | 17,868 | $ | 16,348 | $ | 14,807 | ||||||||||||||||||||||
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At December 31, 2021, the ALL totaled $21.1 million, or 1.15% of total loans, and the ACL, which includes the reserve for unfunded lending commitments, totaled $22.9 million, or 1.24% of total loans. For the year ended December 31, 2021, the Company reversed $10.2 million of the allowance for loan losses compared to $12.7 million provision for the year ended December 31, 2020. The provision for loan losses during 2020 reflected our assessment of the change in expected losses due primarily to the economic impact of the COVID-19 pandemic.
The following table presents the allocation of the allowance for loan losses as of December 31 for the years indicated.
| December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | % Loans | Amount | % Loans | Amount | % Loans | Amount | % Loans | Amount | % Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| One-to four-family first mortgage | $ | 1,944 | 19.1 | % | $ | 3,065 | 20.0 | % | $ | 2,715 | 25.1 | % | $ | 2,136 | 27.3 | % | $ | 1,663 | 28.7 | % | ||||||||||||||||||||||||||||||||||||||||||
| Home equity loans and lines | 508 | 3.2 | 676 | 3.4 | 1,084 | 4.6 | 1,079 | 5.1 | 1,102 | 5.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 10,454 | 43.6 | 18,851 | 37.9 | 6,541 | 42.2 | 6,125 | 38.8 | 4,906 | 36.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction and land | 3,572 | 14.1 | 4,155 | 11.2 | 2,670 | 11.4 | 2,285 | 11.7 | 1,749 | 10.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multi-family residential | 457 | 4.9 | 1,077 | 4.4 | 572 | 3.2 | 550 | 3.3 | 355 | 3.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 3,520 | 13.3 | 4,276 | 21.1 | 3,694 | 10.8 | 3,228 | 10.5 | 4,530 | 11.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer | 634 | 1.8 | 863 | 2.0 | 592 | 2.7 | 945 | 3.3 | 502 | 3.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 21,089 | 100.0 | % | $ | 32,963 | 100.0 | % | $ | 17,868 | 100.0 | % | $ | 16,348 | 100.0 | % | $ | 14,807 | 100.0 | % | ||||||||||||||||||||||||||||||||||||||||||
The following table shows credit ratios at and for the periods indicated and each component of the ratio's calculation:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||
| Allowance for loan losses as a percentage of total loans outstanding | 1.15% | 1.66% | 1.04% | 0.99% | 0.89% | |||||||||||||||||||||||||||
| Allowance for loan losses | $ | 21,089 | $ | 32,963 | $ | 17,868 | $ | 16,348 | $ | 14,807 | ||||||||||||||||||||||
| Total loans outstanding | $ | 1,840,093 | $ | 1,979,954 | $ | 1,714,361 | $ | 1,649,754 | $ | 1,657,795 | ||||||||||||||||||||||
| Nonaccrual loans as a percentage of total loans outstanding | 0.72% | 0.94% | 1.42% | 1.48% | 1.51% | |||||||||||||||||||||||||||
| Total nonaccrual loans | $ | 13,269 | $ | 18,677 | $ | 24,386 | $ | 24,412 | $ | 25,033 | ||||||||||||||||||||||
| Total loans outstanding | $ | 1,840,093 | $ | 1,979,954 | $ | 1,714,361 | $ | 1,649,754 | $ | 1,657,795 | ||||||||||||||||||||||
| Allowance for loan losses as a percentage of nonaccrual loans | 158.93% | 176.49% | 73.27% | 66.97% | 59.15% | |||||||||||||||||||||||||||
| Allowance for loan losses | $ | 21,089 | $ | 32,963 | $ | 17,868 | $ | 16,348 | $ | 14,807 | ||||||||||||||||||||||
| Total nonaccrual loans | $ | 13,269 | $ | 18,677 | $ | 24,386 | $ | 24,412 | $ | 25,033 | ||||||||||||||||||||||
| Net charge-offs during period to average loans outstanding: | ||||||||||||||||||||||||||||||||
| One-to four family residential loans | (0.04)% | (0.02)% | —% | —% | (0.01)% | |||||||||||||||||||||||||||
| Net charge-offs | $ | (131) | $ | (86) | $ | (4) | $ | (1) | $ | (29) | ||||||||||||||||||||||
| Average loans outstanding | $ | 372,207 | $ | 422,156 | $ | 441,183 | $ | 461,712 | $ | 347,120 | ||||||||||||||||||||||
| Net charge-offs during period to average loans outstanding: | ||||||||||||||||||||||||||||||||
| Home equity loans and lines | 0.03% | (0.76)% | (0.03)% | 0.01% | 0.01% | |||||||||||||||||||||||||||
| Net charge-offs | $ | 19 | $ | (559) | $ | (26) | $ | 5 | $ | 10 | ||||||||||||||||||||||
| Average loans outstanding | $ | 62,957 | $ | 73,396 | $ | 80,994 | $ | 89,085 | $ | 88,763 | ||||||||||||||||||||||
| Net charge-offs during period to average loans outstanding: | ||||||||||||||||||||||||||||||||
26
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||
| Commercial real estate | (0.17) | % | 0.01 | % | (0.05) | % | — | % | — | % | ||||||||||||||||||||||
| Net charge-offs | $ | (1,337) | $ | 50 | $ | (360) | $ | — | $ | (3) | ||||||||||||||||||||||
| Average loans outstanding | $ | 769,950 | $ | 728,959 | $ | 686,442 | $ | 619,690 | $ | 462,261 | ||||||||||||||||||||||
| Net charge-offs during period to average loans outstanding: | ||||||||||||||||||||||||||||||||
| Construction and land | 0.03 | % | (0.33) | % | — | % | — | % | — | % | ||||||||||||||||||||||
| Net charge-offs | $ | 63 | $ | (688) | $ | (6) | $ | — | $ | — | ||||||||||||||||||||||
| Average loans outstanding | $ | 241,725 | $ | 205,591 | $ | 194,976 | $ | 174,033 | $ | 131,593 | ||||||||||||||||||||||
| Net charge-offs during period to average loans outstanding: | ||||||||||||||||||||||||||||||||
| Multi-family residential | — | % | — | % | — | % | — | % | — | % | ||||||||||||||||||||||
| Net charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| Average loans outstanding | $ | 87,101 | $ | 72,906 | $ | 50,474 | $ | 53,678 | $ | 47,587 | ||||||||||||||||||||||
| Net charge-offs during period to average loans outstanding: | ||||||||||||||||||||||||||||||||
| Commercial and industrial | (0.08) | % | (0.24) | % | (0.49) | % | (1.30) | % | 0.04 | % | ||||||||||||||||||||||
| Net charge-offs | $ | (286) | $ | (878) | $ | (868) | $ | (2,348) | $ | 50 | ||||||||||||||||||||||
| Average loans outstanding | $ | 356,180 | $ | 360,930 | $ | 178,236 | $ | 180,456 | $ | 134,643 | ||||||||||||||||||||||
| Net charge-offs during period to average loans outstanding: | ||||||||||||||||||||||||||||||||
| Consumer | (0.12) | % | (0.25) | % | (0.47) | % | (0.10) | % | (0.12) | % | ||||||||||||||||||||||
| Net charge-offs | $ | (41) | $ | (105) | $ | (230) | $ | (58) | $ | (49) | ||||||||||||||||||||||
| Average loans outstanding | $ | 35,647 | $ | 41,350 | $ | 49,297 | $ | 58,189 | $ | 41,609 | ||||||||||||||||||||||
Additional Information on Loan Portfolio Composition and the Allowance for Credit Losses
As the fallout of the COVID-19 pandemic continues to impact the national, regional and local economies, management continues to proactively monitor the loan portfolio to identify potential weaknesses that may develop. Specifically, management has identified and is monitoring exposures to borrowers and industries that may be impacted more immediately and acutely than others. In many instances, management has directly reached out to specific borrowers to provide guidance and assistance as appropriate. On a portfolio level, management continues to monitor aggregate exposures to highly sensitive segments for changes in asset quality, payment performance and liquidity levels. Additionally, management is monitoring unfunded commitments, such as lines of credit and overdraft protection, to monitor liquidity and funding issues that may arise with our customers.
The following table provides a summary of the loan portfolio and related reserves at December 31, 2021. We have separately identified certain information regarding PPP loans which, due to the existence of full repayment guarantees from the SBA as well as the likelihood that the vast majority of such loans will be forgiven, we believe entail minimal credit risk to the Company.
27
| (dollars in thousands) | Total Loans | PPP Loans | Total ACL | ACL to Total Loans | ACL to Total Non-PPP Loans | |||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
| Retail CRE | $ | 187,087 | $ | — | $ | 2,536 | 1.36 | % | 1.36 | % | ||||||||||||||||||||||
| Hotels and short-term rentals | 107,625 | 3,110 | 2,841 | 2.64 | 2.72 | |||||||||||||||||||||||||||
| Restaurants and bars | 59,544 | 8,947 | 1,369 | 2.30 | 2.71 | |||||||||||||||||||||||||||
| Energy | 40,324 | — | 827 | 2.05 | 2.05 | |||||||||||||||||||||||||||
| Credit cards | 4,138 | — | 329 | 7.95 | 7.95 | |||||||||||||||||||||||||||
| Other loans | 1,441,375 | 31,580 | 13,187 | 0.91 | 0.94 | |||||||||||||||||||||||||||
| Total | $ | 1,840,093 | $ | 43,637 | $ | 21,089 | 1.15 | % | 1.17 | % | ||||||||||||||||||||||
Unfunded lending commitments(1) | — | — | 1,815 | — | — | |||||||||||||||||||||||||||
| Total | $ | 1,840,093 | $ | 43,637 | $ | 22,904 | 1.24 | % | 1.27 | % | ||||||||||||||||||||||
(1)At December 31, 2021, the allowance of $1.8 million related to unfunded lending commitments of $434.6 million. The ACL on unfunded lending commitments is recorded within accrued interest payable and other liabilities on the Consolidated Statements of Financial Condition.
Asset Quality
One of management’s key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new loan originations, we proactively monitor loans and collection and workout processes of delinquent or problem loans. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made within 10 days after the date payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans which are designated as “special mention,” classified or which are delinquent 90 days or more are reported to the Board of Directors of the Bank monthly. For loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases. It is our policy, with certain limited exceptions, to discontinue accruing interest and reverse any interest accrued on any loan which is 90 days or more past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to their ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt.
An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include smaller balance commercial loans, residential real estate loans and consumer loans. These loans are evaluated as a group because they have similar characteristics and performance experience. Larger (i.e., loans with balances of $500,000 or greater) commercial real estate loans, multi-family residential loans, construction and land loans and commercial and industrial loans are individually evaluated for impairment. Third party property valuations are obtained at the time of origination for real estate secured loans. When a determination is made that a loan has deteriorated to the point of becoming a problem loan, updated valuations may be ordered to help determine if there is impairment, which may lead to a recommendation for partial charge off or appropriate allowance allocation. Property valuations are ordered through, and are reviewed by, an appraisal officer at the Bank. The Company typically orders an “as is” valuation for collateral property if a loan is in a criticized loan classification. The Board of Directors is provided with monthly reports on impaired loans.
At December 31, 2021 and 2020, loans identified as impaired and individually evaluated for expected losses were $4.6 million and $9.0 million, respectively. Due to the adoption of ASC 326, total loans identified as impaired and individually evaluated at December 31, 2021 included $1.1 million of acquired loans, of which none were acquired with deteriorated credit quality. For more information on the adoption of ASC 326, refer to Note 2 of the Consolidated Financial Statements.
The following tables provide a summary of loans identified as impaired and individually evaluated for expected losses as of the dates indicated.
| December 31, 2021 | ||||||||||||||||||||
| (dollars in thousands) | Recorded Investment | Allowance for Loan Losses | Allowance to Total Loans | |||||||||||||||||
| Loans Individually Evaluated | ||||||||||||||||||||
One- to four-family first mortgage | $ | — | $ | — | — | % | ||||||||||||||
| Home equity loans and lines | — | — | — | |||||||||||||||||
| Commercial real estate | 3,873 | 247 | 6.38 | |||||||||||||||||
| Construction and land | — | — | — | |||||||||||||||||
| Multi-family residential | — | — | — | |||||||||||||||||
| Commercial and industrial | 744 | 425 | 57.12 | |||||||||||||||||
| Consumer | — | — | — | |||||||||||||||||
| Total | $ | 4,617 | $ | 672 | 14.55 | % | ||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| (dollars in thousands) | Recorded Investment | Allowance for Loan Losses | Allowance to Total Loans | |||||||||||||||||
| Loans Individually Evaluated | ||||||||||||||||||||
One- to four-family first mortgage | $ | 1,006 | $ | 100 | 9.94 | % | ||||||||||||||
| Home equity loans and lines | — | — | — | |||||||||||||||||
| Commercial real estate | 7,400 | 1,008 | 13.62 | |||||||||||||||||
| Construction and land | — | — | — | |||||||||||||||||
| Multi-family residential | — | — | — | |||||||||||||||||
| Commercial and industrial | 606 | 431 | 71.12 | |||||||||||||||||
| Consumer | — | — | — | |||||||||||||||||
| Total | $ | 9,012 | $ | 1,539 | 17.08 | % | ||||||||||||||
Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. In addition to classified assets, assets which do not currently expose the Bank to sufficient risk to be classified may be categorized as "special mention." Special mention assets have an existing weakness that could cause future impairment.
At December 31, 2021 and 2020, we had a total of $17.5 million and $35.3 million, respectively, in loans classified as substandard. We had no assets classified as doubtful or loss at either date. For additional information, see Note 5 to the Consolidated Financial Statements.
A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation
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processes that meet the objectives set forth in the policy statement. Due to the adoption of ASC 326 on January 1, 2020, management maintains, based on current and forecasted information, an ACL that reflects a current estimate of expected credit losses for the estimated life of the loan portfolio at reporting periods subsequent to the adoption date. For reporting periods prior to January 1, 2020, management maintained an ALL at a level which reflected losses that were probable and reasonably estimable at the relevant reporting date. For all reporting periods, actual losses are uncertain and dependent upon future events and, as such, further additions to the level of ACL may become necessary.
The following table sets forth the composition of the Company’s total nonperforming assets and troubled debt restructurings as of the dates indicated.
| December 31, | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
Nonaccrual loans (1): | ||||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 3,575 | $ | 3,838 | $ | 3,948 | $ | 5,172 | $ | 3,173 | ||||||||||||||||||||||
| Home equity loans and lines | 38 | 63 | 1,244 | 1,699 | 1,542 | |||||||||||||||||||||||||||
| Commercial real estate | 8,431 | 12,298 | 13,325 | 11,343 | 8,757 | |||||||||||||||||||||||||||
| Construction and land | 258 | 469 | 2,469 | 1,594 | 449 | |||||||||||||||||||||||||||
| Multi-family residential | — | — | — | — | — | |||||||||||||||||||||||||||
| Other loans: | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 763 | 1,717 | 3,224 | 3,988 | 10,610 | |||||||||||||||||||||||||||
| Consumer | 204 | 292 | 176 | 616 | 502 | |||||||||||||||||||||||||||
| Total nonaccrual loans | 13,269 | 18,677 | 24,386 | 24,412 | 25,033 | |||||||||||||||||||||||||||
| Accruing loans 90 days or more past due | 6 | 2 | — | — | — | |||||||||||||||||||||||||||
Total nonperforming loans | 13,275 | 18,679 | 24,386 | 24,412 | 25,033 | |||||||||||||||||||||||||||
| Foreclosed assets and ORE | 1,189 | 1,302 | 4,156 | 1,558 | 728 | |||||||||||||||||||||||||||
| Total nonperforming assets | 14,464 | 19,981 | 28,542 | 25,970 | 25,761 | |||||||||||||||||||||||||||
| Performing troubled debt restructurings | 4,963 | 2,085 | 2,378 | 1,406 | 2,536 | |||||||||||||||||||||||||||
| Total nonperforming assets and troubled debt restructurings | $ | 19,427 | $ | 22,066 | $ | 30,920 | $ | 27,376 | $ | 28,297 | ||||||||||||||||||||||
| Nonperforming loans to total loans | 0.72 | % | 0.94 | % | 1.42 | % | 1.48 | % | 1.51 | % | ||||||||||||||||||||||
| Nonperforming loans to total assets | 0.45 | % | 0.72 | % | 1.11 | % | 1.13 | % | 1.12 | % | ||||||||||||||||||||||
| Nonaccrual loans to total loans | 0.72 | % | 0.94 | % | 1.42 | % | 1.48 | % | 1.51 | % | ||||||||||||||||||||||
| Nonperforming assets to total assets | 0.49 | % | 0.77 | % | 1.30 | % | 1.21 | % | 1.16 | % | ||||||||||||||||||||||
| Total loans outstanding | $ | 1,840,093 | $ | 1,979,954 | $ | 1,714,361 | $ | 1,649,754 | $ | 1,657,795 | ||||||||||||||||||||||
| Total assets outstanding | $ | 2,938,244 | $ | 2,591,850 | $ | 2,200,465 | $ | 2,153,658 | $ | 2,228,121 | ||||||||||||||||||||||
(1)Prior to January 1, 2020, PCD loans were classified as PCI under ASC 310-30 and excluded from nonperforming loans because they continued to earn interest income from the accretable yield at the pool level regardless of their status as past due or otherwise not in compliance with their contractual terms. At adoption, the pools were discontinued and performance is based on contractual terms for individual loans. Refer to Note 2 to the Consolidated Financial Statements for more information on the adoption of ASC 326. PCI loans that were 90 days or more past due and were accounted for under ASC 310-30 totaled $2.2 million, $1.7 million and $4.3 million at December 31, 2019, 2018 and 2017, respectively.
As a result of Section 4013 of the CARES Act and recent interagency guidance issued by Federal banking regulators, modifications, such as deferrals of principal and/or interest payments, to borrowers affected by the COVID-19 pandemic are not deemed to be TDRs if such modifications are made on loans that were current as of December 31, 2019. Such deferrals and loan modifications totaled $3.9 million, or less than 1% of total loans, at December 31, 2021 compared to $558.8 million (28% of total loans) at June 30, 2020. We will continue to follow the guidance of Federal banking regulators in making any TDR determinations.
Total nonperforming assets decreased by $5.5 million, or 27.6%, to $14.5 million at December 31, 2021, compared to $20.0 million at December 31, 2020. The ratio of non-performing assets to total assets was 0.49% at December 31, 2021, compared to 0.77% at December 31, 2020.
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As of December 31, 2021, total nonperforming loans were down $5.4 million, or 29.0%, from December 31, 2020 primarily due to pay-downs on nonaccrual loans. Foreclosed assets and ORE were also down $113,000, or 8.7%, from December 31, 2020.
Investment Securities
The Company invests in securities pursuant to our Investment Policy, which has been approved by our Board of Directors. The Investment Policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate or credit risk and to provide and maintain liquidity. The Asset-Liability Committee (“ALCO”), comprised of the Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Credit Officer and Director of Financial Management, monitors investment activity and ensures that investments are consistent with the Investment Policy. The Board of Directors of the Company reviews investment activity monthly.
The investment securities portfolio increased by an aggregate of $72.0 million, or 28.0%, during 2021. Securities available for sale made up 99.4% of the investment securities portfolio as of December 31, 2021. The following table sets forth the amortized cost and market value of our investment securities portfolio as of the dates indicated.
| December 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amortized Cost | Market Value | Amortized Cost | Market Value | Amortized Cost | Market Value | ||||||||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed | $ | 234,720 | $ | 233,773 | $ | 138,669 | $ | 142,812 | $ | 94,446 | $ | 95,172 | ||||||||||||||||||||||||||
| Collateralized mortgage obligations | 31,356 | 31,912 | 74,112 | 75,620 | 142,408 | 142,451 | ||||||||||||||||||||||||||||||||
| Municipal bonds | 51,094 | 50,719 | 27,306 | 28,011 | 15,895 | 16,005 | ||||||||||||||||||||||||||||||||
| U.S. government agency | 5,615 | 5,614 | 6,210 | 6,255 | 3,696 | 3,693 | ||||||||||||||||||||||||||||||||
| Corporate bonds | 5,500 | 5,614 | 2,000 | 2,054 | — | — | ||||||||||||||||||||||||||||||||
Total available for sale | 328,285 | 327,632 | 248,297 | 254,752 | 256,445 | 257,321 | ||||||||||||||||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||||||||||||||
| Municipal bonds | 2,102 | 2,132 | 2,934 | 2,996 | 7,149 | 7,194 | ||||||||||||||||||||||||||||||||
Total held to maturity | 2,102 | 2,132 | 2,934 | 2,996 | 7,149 | 7,194 | ||||||||||||||||||||||||||||||||
Total investment securities | $ | 330,387 | $ | 329,764 | $ | 251,231 | $ | 257,748 | $ | 263,594 | $ | 264,515 | ||||||||||||||||||||||||||
The following table sets forth the fixed versus adjustable rate profile of the investment securities portfolio as of the dates indicated. All amounts are shown at amortized cost.
| December 31, | ||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Fixed rate: | ||||||||||||||||||||
| Available for sale | $ | 300,923 | $ | 230,056 | $ | 234,080 | ||||||||||||||
| Held to maturity | 2,102 | 2,934 | 7,149 | |||||||||||||||||
| Total fixed rate | 303,025 | 232,990 | 241,229 | |||||||||||||||||
| Adjustable rate: | ||||||||||||||||||||
| Available for sale | 27,362 | 18,241 | 22,365 | |||||||||||||||||
| Total adjustable rate | 27,362 | 18,241 | 22,365 | |||||||||||||||||
| Total investment securities | $ | 330,387 | $ | 251,231 | $ | 263,594 | ||||||||||||||
The following table sets forth the amount of investment securities which mature during each of the periods indicated and the weighted average yields for each range of maturities as of December 31, 2021. No tax-exempt yields have been adjusted to a tax-equivalent basis. All amounts are shown at amortized cost.
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| Amounts as of December 31, 2021 which mature in: | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | One Year or Less | After One Year Through Five Years | After Five Through Ten Years | Over Ten Years | Total | |||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed | $ | 988 | $ | 28,541 | $ | 77,888 | $ | 127,303 | $ | 234,720 | ||||||||||||||||||||||
| Collateralized mortgage obligations | 435 | 21,001 | 1,307 | 8,613 | 31,356 | |||||||||||||||||||||||||||
| Municipal bonds | 355 | 500 | 15,742 | 34,497 | 51,094 | |||||||||||||||||||||||||||
| U.S. government agency | — | — | 5,214 | 401 | 5,615 | |||||||||||||||||||||||||||
| Corporate bonds | — | — | 5,500 | — | 5,500 | |||||||||||||||||||||||||||
| Total available for sale | 1,778 | 50,042 | 105,651 | 170,814 | 328,285 | |||||||||||||||||||||||||||
| Weighted average yield | 2.79 | % | 2.22 | % | 1.68 | % | 1.41 | % | 1.63 | % | ||||||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||||||||
| Municipal bonds | — | 1,094 | 1,008 | — | 2,102 | |||||||||||||||||||||||||||
| Total held to maturity | — | 1,094 | 1,008 | — | 2,102 | |||||||||||||||||||||||||||
| Weighted average yield | — | % | 2.11 | % | 1.62 | % | — | % | 1.87 | % | ||||||||||||||||||||||
| Total investment securities | $ | 1,778 | $ | 51,136 | $ | 106,659 | $ | 170,814 | $ | 330,387 | ||||||||||||||||||||||
| Weighted average yield | 2.79 | % | 2.22 | % | 1.68 | % | 1.41 | % | 1.63 | % | ||||||||||||||||||||||
The following table summarizes activity in the Company’s investment securities portfolio during 2021.
| (dollars in thousands) | Available for Sale | Held to Maturity | ||||||||||||
| Balance, December 31, 2020 | $ | 254,752 | $ | 2,934 | ||||||||||
| Purchases | 167,584 | — | ||||||||||||
| Sales | (5,068) | — | ||||||||||||
| Principal maturities, prepayments and calls | (80,686) | (800) | ||||||||||||
| Amortization of premiums and accretion of discounts | (1,842) | (32) | ||||||||||||
| Decrease in market value | (7,108) | |||||||||||||
| Balance, December 31, 2021 | $ | 327,632 | $ | 2,102 | ||||||||||
As of December 31, 2021, the Company had a net unrealized loss on its available for sale investment securities portfolio of $653,000, compared to a net unrealized gain of $6.5 million as of December 31, 2020.
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Funding Sources
General
Deposits, loan repayments and prepayments, proceeds from investment securities sales, calls, maturities and paydowns, cash flows generated from operations and FHLB advances are our primary, ongoing sources of funds for use in lending, investing and for other general purposes.
Deposits
The Company offers a variety of deposit accounts with a range of interest rates and terms. Our deposits consist of checking, both interest-bearing and noninterest-bearing, money market, savings and certificate of deposit accounts.
The flow of deposits is influenced significantly by general economic conditions, changes in market interest rates and competition. Our deposits are obtained predominantly from the areas where our branch offices are located. We have historically relied primarily on a high level of customer service and long-standing relationships with customers to attract and retain deposits; however, market interest rates and rates offered by competitors significantly affect our ability to attract and retain deposits.
Total deposits were $2.5 billion as of December 31, 2021, up $322.0 million, or 14.5%, compared to December 31, 2020. Certificates of deposits totaled $319.3 million as of December 31, 2021, down $49.5 million, or 13.4%, compared to December 31, 2020. The following table sets forth the composition of the Company’s deposits as of the dates indicated.
| December 31, | Increase/(Decrease) | |||||||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | Amount | Percent | ||||||||||||||||||||||
| Demand deposit | $ | 766,385 | $ | 615,700 | $ | 150,685 | 24.5 | % | ||||||||||||||||||
| Savings | 285,728 | 250,165 | 35,563 | 14.2 | ||||||||||||||||||||||
| Money market | 371,478 | 333,078 | 38,400 | 11.5 | ||||||||||||||||||||||
| NOW | 792,919 | 646,085 | 146,834 | 22.7 | ||||||||||||||||||||||
| Certificates of deposit | 319,339 | 368,793 | (49,454) | (13.4) | ||||||||||||||||||||||
| Total deposits | $ | 2,535,849 | $ | 2,213,821 | $ | 322,028 | 14.5 | % | ||||||||||||||||||
The following table shows the daily average balances of deposits by type and weighted-average rate paid for the periods indicated.
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Average Balance | Interest Expense | Average Rate Paid | Average Balance | Interest Expense | Average Rate Paid | Average Balance | Interest Expense | Average Rate Paid | ||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | $ | 717,536 | $ | 581,385 | $ | 443,063 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits | 274,359 | $ | 367 | 0.13 | % | 228,500 | 610 | 0.27 | % | 203,246 | 1,023 | 0.50 | % | |||||||||||||||||||||||||||||||||||||||||||
| Savings | 689,991 | 1,940 | 0.28 | 606,623 | 3,353 | 0.55 | 501,766 | 4,609 | 0.92 | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market accounts | 353,643 | 575 | 0.16 | 305,029 | 1,311 | 0.43 | 282,255 | 2,728 | 0.97 | |||||||||||||||||||||||||||||||||||||||||||||||
| Certificates of deposit | 338,487 | 2,348 | 0.69 | 385,363 | 5,760 | 1.49 | 384,657 | 6,690 | 1.74 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 1,656,480 | 5,230 | 0.32 | % | 1,525,515 | 11,034 | 0.72 | % | 1,371,924 | 15,050 | 1.10 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total deposits | $ | 2,374,016 | $ | 2,106,900 | $ | 1,814,987 | ||||||||||||||||||||||||||||||||||||||||||||||||||
32
The total amount of our uninsured deposits (deposits in excess of $250,000, as calculated in accordance with FDIC regulations) were $820.0 million at December 31, 2021 and $596.0 million at December 31, 2020. Certificates of deposit in the amount of $250,000 and over decreased $5.8 million, or 8.5%, from $69.1 million at December 31, 2020 to $63.2 million at December 31, 2021. The following table details the remaining maturity of large-denomination certificates of deposit of $250,000 and over as of the dates indicated.
| December 31, | ||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| 3 months or less | $ | 19,481 | $ | 24,321 | $ | 15,465 | ||||||||||||||
| 3 - 6 months | 13,586 | 15,298 | 33,056 | |||||||||||||||||
| 6 - 12 months | 21,631 | 19,665 | 14,192 | |||||||||||||||||
| 12 - 36 months | 7,355 | 9,004 | 10,700 | |||||||||||||||||
| More than 36 months | 1,168 | 772 | 1,400 | |||||||||||||||||
| Total certificates of deposit greater than $250,000 | $ | 63,221 | $ | 69,060 | $ | 74,813 | ||||||||||||||
Federal Home Loan Bank Advances
Advances from the FHLB may be obtained by the Company upon the security of the common stock it owns in the FHLB and certain real estate loans and investment securities, provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Advances from the FHLB may be either short-term, maturities of one year or less, or long-term, maturities in excess of one year.
The Company had no short-term FHLB advances as of December 31, 2021 and 2020. Long-term FHLB advances totaled $26.0 million as of December 31, 2021, down $2.8 million, or 9.6%, compared to $28.8 million as of December 31, 2020.
Average FHLB advances were $27.3 million during 2021, down $17.7 million, or 39.4%, from 2020.
Shareholders’ Equity
Shareholders’ equity provides a source of permanent funding, allows for future growth and provides the Company with a cushion to withstand unforeseen adverse developments. At December 31, 2021, shareholders’ equity totaled $351.9 million, up $30.1 million, or 9.3%, compared to $321.8 million at December 31, 2020. The increase was primarily due to the Company’s earnings for the year ended December 31, 2021, which was partially offset by other comprehensive loss, share repurchases, and dividends paid during 2021.
33
RESULTS OF OPERATIONS
Net income in 2021 was $48.6 million, up $23.9 million, or 96.3%, compared to 2020. Diluted EPS for 2021 was $5.77, up $2.92, or 102.5% from 2020. The net income in 2021 was significantly impacted by the reversal of provision for loan losses primarily due to improvement in our assessment of the economic impact of the COVID-19 pandemic over the prior year and the recognition of PPP lender fees. For the year ended December 31, 2021, the Company reversed $10.2 million of the allowance for loan losses compared to $12.7 million provision for the year ended December 31, 2020. The provision for loan losses during 2020 reflected our assessment of expected losses due primarily to the economic impact of the COVID-19 pandemic.
Net income in 2020 was $24.8 million, down $3.2 million, or 11.3%, compared to 2019. Diluted EPS for 2020 was $2.85, down $0.20, or 6.6% from 2019. The decrease in net income was primarily due to the provision for loan losses in 2020 (most of which was recorded in the first and second quarters of the year).
Net Interest Income
Net interest income is the difference between the interest income earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. Our net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s net interest spread was 3.76%, 3.72% and 3.94% for the years ended December 31, 2021, 2020, and 2019, respectively.
Net interest income totaled $101.0 million in 2021, up $8.8 million, or 9.5%, compared to $92.2 million in 2020. The increase was primarily due to lower deposit costs and an increase in loan income primarily due to PPP loans. Total interest expense on deposits decreased $5.8 million, or 52.6%, in 2021 compared to 2020. The average cost of total interest-bearing deposits decreased by 40 basis points to 0.32% in 2021.
The Company recognized $11.4 million and $4.1 million of PPP lender fees in loan interest income in 2021 and 2020, respectively. The remaining balance of $1.3 million in deferred lender fees at December 31, 2021 will be amortized into interest income over the life of the PPP loans. Outstanding PPP loans positively impacted the average loan yield by 24 basis points and the net interest margin by 27 basis points during 2021.
In addition, the increase in average cash and cash equivalents from 2020 to 2021 negatively impacted the average yield on total interest-earning assets and the net interest margin by 39 basis points and 37 basis points, respectively. Average cash and cash equivalents are reflected in the increase in the average balance of other interest-earning assets. Average other interest-earning assets during 2021 were up $225.1 million from the average of $142.2 million during 2020.
In 2020, net interest income totaled $92.2 million, up $6.2 million, or 7.2%, compared to $86.0 million in 2019. The increase in net interest income for 2020 compared to 2019 was primarily due to lower deposit costs and an increase in loan income primarily due to PPP loans during 2020. Total interest expense on deposits decreased $4.0 million, or 26.7%, in 2020 compared to 2019. The average cost of total interest-bearing deposits in 2020 totaled 0.72%, down 38 basis points from 2019.
The Company’s net interest margin, which is net interest income as a percentage of average interest-earning assets, was 3.88%, 3.96%, and 4.26% during the years ended December 31, 2021, 2020, and 2019, respectively.
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The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income to the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) net interest spread; and (v) net interest margin. Information is based on average monthly balances during the indicated periods. Taxable equivalent (“TE”) yields have been calculated using a marginal tax rate of 21%.
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Yield/ Rate | Average Balance | Interest | Average Yield/ Rate | Average Balance | Interest | Average Yield/ Rate | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable(1) | $ | 1,925,767 | $ | 101,577 | 5.22 | % | $ | 1,905,288 | $ | 99,106 | 5.14 | % | $ | 1,681,604 | $ | 94,414 | 5.56 | % | ||||||||||||||||||||||||||||||||||||||
Investment securities(TE) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable | 263,459 | 4,301 | 1.63 | 240,161 | 4,228 | 1.76 | 243,404 | 5,886 | 2.42 | |||||||||||||||||||||||||||||||||||||||||||||||
| Tax-exempt | 19,506 | 339 | 2.20 | 14,304 | 335 | 2.96 | 22,877 | 507 | 2.80 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total investment securities | 282,965 | 4,640 | 1.67 | 254,465 | 4,563 | 1.83 | 266,281 | 6,393 | 2.45 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other interest-earning assets | 367,241 | 685 | 0.19 | 142,171 | 460 | 0.32 | 55,029 | 1,401 | 2.55 | |||||||||||||||||||||||||||||||||||||||||||||||
Total interest-earning assets(TE) | 2,575,973 | 106,902 | 4.11 | 2,301,924 | 104,129 | 4.48 | 2,002,914 | 102,208 | 5.07 | |||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-earning assets | 189,905 | 189,688 | 195,569 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 2,765,878 | $ | 2,491,612 | $ | 2,198,483 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Savings, checking and money market | $ | 1,317,993 | $ | 2,882 | 0.22 | % | $ | 1,140,152 | $ | 5,274 | 0.46 | % | $ | 987,267 | $ | 8,360 | 0.85 | % | ||||||||||||||||||||||||||||||||||||||
| Certificates of deposit | 338,487 | 2,348 | 0.69 | 385,363 | 5,760 | 1.49 | 384,657 | 6,690 | 1.74 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 1,656,480 | 5,230 | 0.32 | 1,525,515 | 11,034 | 0.72 | 1,371,924 | 15,050 | 1.10 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other borrowings | 5,581 | 212 | 3.81 | 5,539 | 212 | 3.83 | 5,542 | 213 | 3.83 | |||||||||||||||||||||||||||||||||||||||||||||||
| FHLB advances | 27,319 | 471 | 1.72 | 45,065 | 672 | 1.49 | 52,485 | 949 | 1.81 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,689,380 | 5,913 | 0.35 | 1,576,119 | 11,918 | 0.76 | 1,429,951 | 16,212 | 1.13 | |||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing liabilities | 738,491 | 599,362 | 456,547 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | 2,427,871 | 2,175,481 | 1,886,498 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 338,007 | 316,131 | 311,985 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 2,765,878 | $ | 2,491,612 | $ | 2,198,483 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest-earning assets | $ | 886,593 | $ | 725,805 | $ | 572,963 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income; net interest spread(TE) | $ | 100,989 | 3.76 | % | $ | 92,211 | 3.72 | % | $ | 85,996 | 3.94 | % | ||||||||||||||||||||||||||||||||||||||||||||
Net interest margin(TE) | 3.88 | % | 3.96 | % | 4.26 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Nonperforming loans are included in the respective average loan balances, net of deferred fees, discounts and loans in process. Acquired loans were recorded at fair value upon acquisition and accrete interest income over the remaining life of the respective loans.
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The following table displays the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in average volume between periods times prior year rate), (ii) changes attributable to rate (changes in average rate between periods times prior year volume) and (iii) total increase (decrease).
2021 Compared to 2020 Change Attributable To | 2020 Compared to 2019 Change Attributable To | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Rate | Volume | Total Increase (Decrease) | Rate | Volume | Total Increase (Decrease) | ||||||||||||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||||||||||||||||
| Loans receivable | $ | 1,320 | $ | 1,151 | $ | 2,471 | $ | (115) | $ | 4,807 | $ | 4,692 | ||||||||||||||||||||||||||
| Investment securities | (84) | 161 | 77 | (1,071) | (759) | (1,830) | ||||||||||||||||||||||||||||||||
| Other interest-earning assets | (4) | 229 | 225 | (904) | (37) | (941) | ||||||||||||||||||||||||||||||||
| Total interest income | 1,232 | 1,541 | 2,773 | (2,090) | 4,011 | 1,921 | ||||||||||||||||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||||||||||||||
| Savings, checking and money market accounts | (1,645) | (747) | (2,392) | (2,191) | (895) | (3,086) | ||||||||||||||||||||||||||||||||
| Certificates of deposit | (2,006) | (1,406) | (3,412) | (585) | (345) | (930) | ||||||||||||||||||||||||||||||||
| Other borrowings | — | — | — | — | (1) | (1) | ||||||||||||||||||||||||||||||||
| FHLB advances | (81) | (120) | (201) | (133) | (144) | (277) | ||||||||||||||||||||||||||||||||
| Total interest expense | (3,732) | (2,273) | (6,005) | (2,909) | (1,385) | (4,294) | ||||||||||||||||||||||||||||||||
| Increase (decrease) in net interest income | $ | 4,964 | $ | 3,814 | $ | 8,778 | $ | 819 | $ | 5,396 | $ | 6,215 | ||||||||||||||||||||||||||
Interest income includes interest income earned on earning assets as well as applicable loan fees earned. Interest income that would have been earned on nonaccrual loans had they been on accrual status is not included in the data reported above.
Provision for Loan Losses
Effective January 1, 2020, the Company adopted the guidance under ASC 326, which introduced a new model known as CECL. For reporting periods beginning on and after January 1, 2020, our activity in the provision for loan losses, which are charges or recoveries to operating results, is undertaken to maintain a level of allowance that reflects expected losses for the full life of the financial assets. Prior to January 1, 2020 and the adoption of ASC 326, the activity in the provision for loan losses was recorded to maintain the allowance at an amount which management determined covered reasonably estimable and probable losses. For more information on the adoption of ASC 326, refer to Note 2 of the Consolidated Financial Statements.
For the year ended December 31, 2021, the Company reversed $10.2 million of the allowance for loan losses compared to provisions of $12.7 million and $3.0 million for 2020 and 2019, respectively. The provision for loan losses during 2020 reflected our assessment of the change in expected losses due primarily to the economic impact of the COVID-19 pandemic.
Net charge-offs were $1.7 million for 2021, compared to net charge-offs of $2.3 million and $1.5 million for 2020 and 2019, respectively. Net loan charge-offs for 2021 were primarily attributable to an acquired hotel loan and one originated commercial relationship, both of which were nonperforming prior to the COVID-19 crisis. Charge-offs during 2020 were primarily related to $1.0 million on two acquired commercial relationships and $806,000 on an originated commercial relationship classified as substandard prior to the COVID-19 pandemic.
Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Allowance for Credit Losses" provides more information on the changes in the ALL and ACL.
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Noninterest Income
The following table illustrates the primary components of noninterest income for the years indicated.
| (dollars in thousands) | 2021 | 2020 | 2021 vs 2020 Percent Increase (Decrease) | 2019 | 2020 vs 2019 Percent Increase (Decrease) | |||||||||||||||||||||||||||
| Noninterest income: | ||||||||||||||||||||||||||||||||
| Service fees and charges | $ | 4,702 | $ | 4,646 | 1.2 | % | $ | 5,940 | (21.8) | % | ||||||||||||||||||||||
| Bank card fees | 5,935 | 4,868 | 21.9 | 4,516 | 7.8 | |||||||||||||||||||||||||||
| Gain on sale of loans, net | 2,518 | 2,925 | (13.9) | 1,074 | 172.3 | |||||||||||||||||||||||||||
| Income from bank-owned life insurance | 2,603 | 994 | 161.9 | 2,069 | (52.0) | |||||||||||||||||||||||||||
| Loss on sale of assets, net | (504) | (11) | 4,481.8 | (335) | (96.7) | |||||||||||||||||||||||||||
| Other income | 1,017 | 883 | 15.2 | 1,151 | (23.3) | |||||||||||||||||||||||||||
| Total noninterest income | $ | 16,271 | $ | 14,305 | 13.7 | % | $ | 14,415 | (0.8) | % | ||||||||||||||||||||||
2021 compared to 2020
Noninterest income for 2021 totaled $16.3 million, up $2.0 million, or 13.7%, compared to 2020. Income from BOLI for 2021 was up $1.6 million, or 161.9%, from 2020 primarily due to the recognition of a life insurance benefit of $1.7 million following the death of an employee during the third quarter of 2021.
Income from bank card fees for 2021 were up $1.1 million, or 21.9%, from 2020 primarily due to to increased transaction activity by our cardholders.
Losses on the sale of assets for 2021 totaled $504,000. This was an increase in losses of $493,000 from 2020. During the second quarter of 2021, the Company sold and leased back one of its Mississippi branch locations. The sale transferred control to the buyer-lessor and all losses were recognized at the time of the sale. The Company believes that the sale/leaseback will reduce the operating expenses related to this branch office in future periods.
2020 compared to 2019
Noninterest income for 2020 totaled $14.3 million, down $110,000, or 0.8%, compared to 2019. The decrease was primarily due to a decrease in service fees and charges (down $1.3 million) and the absence of $1.2 million death benefit from a BOLI policy recognized in 2019, which were partially offset by an increase in gains on the sale of loans (up $1.9 million).
Noninterest Expense
The following table illustrates the primary components of noninterest expense for the years indicated.
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| (dollars in thousands) | 2021 | 2020 | 2021 vs 2020 Percent Increase (Decrease) | 2019 | 2020 vs 2019 Percent Increase (Decrease) | |||||||||||||||||||||||||||
| Noninterest expense: | ||||||||||||||||||||||||||||||||
| Compensation and benefits | $ | 39,151 | $ | 37,935 | 3.2 | % | $ | 38,415 | (1.2) | % | ||||||||||||||||||||||
| Occupancy | 6,970 | 6,794 | 2.6 | 7,118 | (4.6) | |||||||||||||||||||||||||||
| Marketing and advertising | 1,871 | 1,132 | 65.3 | 1,576 | (28.2) | |||||||||||||||||||||||||||
| Data processing and communication | 8,500 | 7,343 | 15.8 | 6,611 | 11.1 | |||||||||||||||||||||||||||
| Professional services | 1,178 | 852 | 38.3 | 856 | (0.5) | |||||||||||||||||||||||||||
| Forms, printing and supplies | 644 | 625 | 3.0 | 683 | (8.5) | |||||||||||||||||||||||||||
| Franchise and shares tax | 1,475 | 1,487 | (0.8) | 1,444 | 3.0 | |||||||||||||||||||||||||||
| Regulatory fees | 1,317 | 1,377 | (4.4) | 830 | 65.9 | |||||||||||||||||||||||||||
| Foreclosed assets, net | 453 | 505 | (10.3) | 556 | (9.2) | |||||||||||||||||||||||||||
| Amortization of acquisition intangible | 1,163 | 1,360 | (14.5) | 1,583 | (14.1) | |||||||||||||||||||||||||||
| Provision for credit losses on unfunded commitments | 390 | — | — | — | — | |||||||||||||||||||||||||||
| Other expenses | 3,870 | 3,571 | 8.4 | 3,933 | (9.2) | |||||||||||||||||||||||||||
| Total noninterest expense | $ | 66,982 | $ | 62,981 | 6.4 | % | $ | 63,605 | (1.0) | % | ||||||||||||||||||||||
2021 compared to 2020
Noninterest expense for 2021 totaled $67.0 million, up $4.0 million, or 6.4%, from 2020.
Compensation and benefits expense for 2021 was up $1.2 million, or 3.2% compared to 2020 primarily due to increased health insurance costs, salaries and compensation expense related to the Company's ESOP driven primarily by the increase in market value of shares of the Company's common stock held by the ESOP.
Data processing and communication expense for 2021 was up $1.2 million, or 15.8%, compared to 2020 primarily due to a general increase in the cost of software and data processing, increased costs related to higher PPP loan origination volume as well as costs related to the implementation of enhancements to our lending software.
Marketing and advertising expense for 2021 was up $739,000, or 65.3%, compared to 2020 primarily due to an increase in donations and general advertising activities.
Professional fees for 2021 were up $326,000, or 38.3%, compared to 2020 primarily due to merger related expenses.
2020 compared to 2019
Noninterest expense for 2020 totaled $63.0 million, a decrease of $624,000, or 1.0%, from 2019. The decrease in noninterest expense in 2020 was primarily in compensation and benefits (down $480,000), marketing and advertising expense (down $444,000), occupancy (down $324,000), which were offset with increases in data processing and communications (up $732,000) and regulatory fees (up $547,000).
Income Taxes
For the years ended December 31, 2021, 2020 and 2019, the Company incurred income tax expense of $11.8 million, $6.0 million and $5.9 million, respectively. The Company’s effective tax rate was 19.6%, 19.6% and 17.3% for 2021, 2020 and 2019, respectively.
The Company's effective tax rate in 2021 remained consistent with 2020 and increased compared to 2019 due to the absence of certain non-recurring transactions. During 2019, the Company received a non-taxable BOLI benefit of $1.2 million following the death of a former employee.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are from deposits, amortization of loans, loan prepayments and the maturity of loans, investment securities and other investments and other funds provided from operations. While scheduled payments from the amortization of loans and investment securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity.
We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets and to meet operating expenses. At December 31, 2021, certificates of deposit maturing within the next 12 months totaled $251.6 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us.
In addition to cash flows from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs. In recent years, we have utilized borrowings as a cost efficient addition to deposits as a source of funds. Our borrowings consist of advances from the FHLB, of which we are a member. Under terms of the collateral agreement with the FHLB, we may pledge residential mortgage loans and mortgage-backed securities as well as our stock in the FHLB as collateral for such advances. For the year ended December 31, 2021, the average balance of our outstanding FHLB advances was $27.3 million. At December 31, 2021, we had $26.0 million in outstanding long-term FHLB advances and $810.4 million in additional FHLB advances available to us.
Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer-term basis, the Company maintains a strategy of investing in various lending and investment security products. The Company uses its sources of funds primarily to meet its ongoing commitments and fund loan commitments. The Company has been able to generate sufficient cash through its deposits, as well as borrowings, and anticipates it will continue to have sufficient funds to meet its liquidity requirements.
ASSET/ LIABILITY MANAGEMENT AND MARKET RISK
The objective of asset/liability management is to implement strategies for the funding and deployment of the Company’s financial resources that are expected to maximize soundness and profitability over time at acceptable levels of risk. Interest rate sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. The Company measures its interest rate sensitivity over the near term primarily by running net interest income simulations.
Our interest rate sensitivity is also monitored by management through the use of models which generate estimates of the change in its net interest income over a range of interest rate scenarios. Based on the Company’s interest rate risk model, the table below sets forth the results of immediate and sustained changes in interest rates as of December 31, 2021.
| Shift in Interest Rates (in bps) | % Change in Projected Net Interest Income | |||||||
| +300 | 19.8% | |||||||
| +200 | 13.4 | |||||||
| +100 | 6.7 | |||||||
| -100 | (6.2) | |||||||
The actual impact of changes in interest rates will depend on many factors. These factors include the Company’s ability to achieve expected growth in interest-earning assets and maintain a desired mix of interest-earning assets and interest-bearing liabilities, the actual timing of asset and liability repricing, the magnitude of interest rate changes and corresponding movement in interest rate spreads and the level of success of asset/liability management strategies.
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from the interest rate risk, which is inherent in our lending and deposit taking activities. To that end, management actively monitors and manages interest rate risk exposure. In addition to market risk, our primary risk is credit risk on our loan portfolio. We attempt to manage credit risk through our loan underwriting and oversight policies.
The principal objective of our interest rate risk management function is to evaluate the interest rate risk embedded in certain balance sheet accounts, determine the level of risk appropriate given our business strategy, operating environment, capital
39
and liquidity requirements, performance objectives and interest rate environment and manage the risk consistent with approved guidelines. We seek to manage our exposure to risks from changes in interest rates while at the same time trying to improve our net interest spread. We monitor interest rate risk as such risk relates to our operating strategies. ALCO is responsible for reviewing our asset/liability and investment policies and interest rate risk position. ALCO meets at least monthly. The extent of the movement of interest rates is an uncertainty that could have a negative impact on future earnings.
We primarily have utilized the following strategies in our efforts to manage interest rate risk:
•we have increased our originations of shorter term loans, particularly commercial real estate and commercial and industrial loans;
•we generally sell our conforming long-term (30-year) fixed-rate single-family residential mortgage loans into the secondary market; and
•we have invested in securities, consisting primarily of mortgage-backed securities and collateral mortgage obligations, with relatively short average lives, generally three to five years, and we maintain adequate amounts of liquid assets.
In addition to the strategies above, the Company entered into certain interest rate swap agreements during the second quarter of 2020 as part of its interest rate risk management strategy. The Company’s objectives in using interest rate derivatives are to manage its exposure to interest rate movements. During 2021 and 2020, such derivatives were used to hedge the variable cost associated with existing variable rate liabilities. Refer to Note 13, Derivatives and Hedging Activities, of the Consolidated Financial Statements for more information on the effects of the derivative financial instruments on the consolidated financial statements.
To meet the financing needs of its customers, the Company issues financial instruments which represent conditional obligations that are not recognized, wholly or in part, in the statements of financial condition. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments expose the Company to varying degrees of credit and interest rate risk in much the same way as funded loans. The same credit policies are used in these commitments as for on-balance sheet instruments. The Company’s exposure to credit losses from these financial instruments is represented by their contractual amounts.
The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and the undisbursed portion of construction loans as of December 31 of the years indicated.
| Contract Amount | ||||||||||||||
| (dollars in thousands) | 2021 | 2020 | ||||||||||||
| Standby letters of credit | $ | 5,075 | $ | 5,781 | ||||||||||
| Available portion of lines of credit | 320,611 | 266,349 | ||||||||||||
| Undisbursed portion of loans in process | 142,048 | 99,527 | ||||||||||||
| Commitments to originate loans | 153,487 | 139,471 | ||||||||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements.
Unfunded commitments under commercial lines of credit and revolving credit lines are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
The Company is subject to certain claims and litigation arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the financial position or results of operations of the Company.
40
The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and the undisbursed portion of construction loans as of December 31, 2021.
| (dollars in thousands) | Less Than One Year | One to Three Years | Three to Five Years | Over Five Years | Total | |||||||||||||||||||||||||||
| Unused commercial lines of credit | $ | 103,147 | $ | 68,071 | $ | 22,557 | $ | 8,264 | $ | 202,039 | ||||||||||||||||||||||
| Unused personal lines of credit | 37,679 | 12,276 | 13,191 | 55,426 | 118,572 | |||||||||||||||||||||||||||
| Undisbursed portion of loans in process | 78,086 | 32,848 | 15,994 | 15,120 | 142,048 | |||||||||||||||||||||||||||
| Standby letters of credit | 4,199 | 876 | — | — | 5,075 | |||||||||||||||||||||||||||
| Commitments to originate loans | 146,077 | 7,410 | — | — | 153,487 | |||||||||||||||||||||||||||
| Total | $ | 369,188 | $ | 121,481 | $ | 51,742 | $ | 78,810 | $ | 621,221 | ||||||||||||||||||||||
The Company has utilized leasing arrangements to support the ongoing activities of the Company. The required payments under such commitments and other contractual cash commitments as of December 31, 2021 are shown in the following table.
| (dollars in thousands) | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||
| Operating leases | $ | 475 | $ | 475 | $ | 436 | $ | 365 | $ | 354 | $ | 1,484 | $ | 3,589 | ||||||||||||||||||||||||||||||
| Certificates of deposit | 251,554 | 45,071 | 13,398 | 4,216 | 2,654 | 2,446 | 319,339 | |||||||||||||||||||||||||||||||||||||
| Long-term FHLB advances | 4,207 | 3,036 | 4,294 | 10,911 | 3,598 | — | 26,046 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 256,236 | $ | 48,582 | $ | 18,128 | $ | 15,492 | $ | 6,606 | $ | 3,930 | $ | 348,974 | ||||||||||||||||||||||||||||||
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability Management and Market Risk” in Item 7 hereof is incorporated herein by reference.
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Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Home Bancorp, Inc.
Lafayette, Louisiana
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated statements of financial condition of Home Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
42
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter below does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Estimate of the allowance for loan losses – reserves related to loans collectively evaluated for impairment
As described in Notes 2 and 5 to the consolidated financial statements, the Company’s allowance for loan losses (“ALL”) totaled $21.0 million of which $20.4 million relates to loans collectively evaluated for impairment (“general reserves”). The Company has identified loan pools with similar risk characteristics. The Company estimated the general reserves for all loan pools using the discounted cash flow method, except for general reserves for the credit card portfolio which were estimated using the remaining life method.
The discounted cash flow method utilizes loan-level term information (including maturity date, payment amount, and interest rate) and certain assumptions by management (including default rates, prepayment speeds, and curtailment rates) to estimate the expected future cash flows for the full life of each loon pool. The difference between the expected future cash flows are discounted and these amounts are then adjusted for certain qualitative factors related to current conditions in addition to adjustments for reasonable and supportable forecasts for future periods to arrive at general reserves.
The remaining life method utilized by the Company to estimate general reserves for the credit card portfolio applies historical loss rates to the portfolio over the estimated remaining life of the portfolio then adjusts for certain qualitative factors related to current conditions in addition to adjustments for reasonable and supportable forecasts for future periods to arrive at general reserves for credit cards.
We identified the estimate of the reserves related to loans collectively evaluated for impairment as a critical audit matter because auditing this portion of the ALL required significant auditor judgment and evaluation of significant estimates requiring industry knowledge and experience. The estimate of the reserves related to individually evaluated loans did not require the same degree of auditor judgment; therefore, we did not identify this portion of ALL as a critical audit matter.
The primary audit procedures we performed to address this critical audit matter included:
•We evaluated the design and tested the operating effectiveness of key controls relating to the Company’s ALL calculation, including controls over the segmentation of the loan portfolio, the periods and assumptions used in the calculation, the determination of qualitative factors including reasonable and supportable forecasts, and the precision of management’s review and approval of the calculation and resulting estimate.
•We tested the completeness and accuracy of the data used by management to calculate general reserves.
43
•We tested the completeness and accuracy of the data used by management in determining qualitative factor adjustments, including the reasonable and supportable factors, by agreeing them to internal and external information.
•We analyzed the qualitative factors in comparison to historical periods to evaluate the directional consistency in relation to the Company’s loan portfolio and local economy.
We have served as the Company’s auditor since 2009.
| Atlanta, Georgia | ||
March 10, 2022 | ||
44
HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| December 31, | ||||||||||||||
| (dollars in thousands) | 2021 | 2020 | ||||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | 601,443 | $ | 187,952 | ||||||||||
| Interest-bearing deposits in banks | 349 | 349 | ||||||||||||
| Investment securities available for sale, at fair value | 327,632 | 254,752 | ||||||||||||
Investment securities held to maturity (fair values of $2,132 and $2,996, respectively) | 2,102 | 2,934 | ||||||||||||
| Mortgage loans held for sale | 1,104 | 9,559 | ||||||||||||
| Loans, net of unearned income | 1,840,093 | 1,979,954 | ||||||||||||
| Allowance for loan losses | (21,089) | (32,963) | ||||||||||||
| Total loans, net of unearned income and allowance for loan losses | 1,819,004 | 1,946,991 | ||||||||||||
| Office properties and equipment, net | 43,542 | 45,497 | ||||||||||||
| Cash surrender value of bank-owned life insurance | 40,361 | 40,334 | ||||||||||||
| Goodwill and core deposit intangibles | 61,949 | 63,112 | ||||||||||||
| Accrued interest receivable and other assets | 40,758 | 40,370 | ||||||||||||
| Total Assets | $ | 2,938,244 | $ | 2,591,850 | ||||||||||
| Liabilities | ||||||||||||||
| Deposits: | ||||||||||||||
| Noninterest-bearing | $ | 766,385 | $ | 615,700 | ||||||||||
| Interest-bearing | 1,769,464 | 1,598,121 | ||||||||||||
| Total deposits | 2,535,849 | 2,213,821 | ||||||||||||
| Other borrowings | 5,539 | 5,539 | ||||||||||||
| Long-term Federal Home Loan Bank advances | 26,046 | 28,824 | ||||||||||||
| Accrued interest payable and other liabilities | 18,907 | 21,824 | ||||||||||||
| Total Liabilities | 2,586,341 | 2,270,008 | ||||||||||||
| Shareholders’ Equity | ||||||||||||||
Preferred stock, $0.01 par value - 10,000,000 shares authorized; none issued | — | — | ||||||||||||
Common stock, $0.01 par value - 40,000,000 shares authorized; 8,526,907 and 8,740,104 shares issued and outstanding, respectively | 85 | 87 | ||||||||||||
| Additional paid-in capital | 164,982 | 164,988 | ||||||||||||
| Unallocated common stock held by: | ||||||||||||||
| Employee Stock Ownership Plan (ESOP) | (2,410) | (2,767) | ||||||||||||
| Recognition and Retention Plan (RRP) | (13) | (22) | ||||||||||||
| Retained earnings | 188,515 | 154,282 | ||||||||||||
| Accumulated other comprehensive income | 744 | 5,274 | ||||||||||||
| Total Shareholders’ Equity | 351,903 | 321,842 | ||||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 2,938,244 | $ | 2,591,850 | ||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
45
HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
| For the Years Ended December 31, | ||||||||||||||||||||
| (dollars in thousands except per share data) | 2021 | 2020 | 2019 | |||||||||||||||||
| Interest Income | ||||||||||||||||||||
| Loans, including fees | $ | 101,577 | $ | 99,106 | $ | 94,414 | ||||||||||||||
| Investment securities: | ||||||||||||||||||||
| Taxable interest | 4,301 | 4,228 | 5,886 | |||||||||||||||||
| Tax-exempt interest | 339 | 335 | 507 | |||||||||||||||||
| Other investments and deposits | 685 | 460 | 1,401 | |||||||||||||||||
| Total interest income | 106,902 | 104,129 | 102,208 | |||||||||||||||||
| Interest Expense | ||||||||||||||||||||
| Deposits | 5,230 | 11,034 | 15,050 | |||||||||||||||||
| Other borrowings expense | 212 | 212 | 213 | |||||||||||||||||
| Short-term Federal Home Loan Bank advances | — | 23 | — | |||||||||||||||||
| Long-term Federal Home Loan Bank advances | 471 | 649 | 949 | |||||||||||||||||
| Total interest expense | 5,913 | 11,918 | 16,212 | |||||||||||||||||
| Net interest income | 100,989 | 92,211 | 85,996 | |||||||||||||||||
| Provision for loan losses | (10,161) | 12,728 | 3,014 | |||||||||||||||||
| Net interest income after provision for loan losses | 111,150 | 79,483 | 82,982 | |||||||||||||||||
| Noninterest Income | ||||||||||||||||||||
| Service fees and charges | 4,702 | 4,646 | 5,940 | |||||||||||||||||
| Bank card fees | 5,935 | 4,868 | 4,516 | |||||||||||||||||
| Gain on sale of loans, net | 2,518 | 2,925 | 1,074 | |||||||||||||||||
| Income from bank-owned life insurance | 2,603 | 994 | 2,069 | |||||||||||||||||
| Loss on sale of assets, net | (504) | (11) | (335) | |||||||||||||||||
| Other income | 1,017 | 883 | 1,151 | |||||||||||||||||
| Total noninterest income | 16,271 | 14,305 | 14,415 | |||||||||||||||||
| Noninterest Expense | ||||||||||||||||||||
| Compensation and benefits | 39,151 | 37,935 | 38,415 | |||||||||||||||||
| Occupancy | 6,970 | 6,794 | 7,118 | |||||||||||||||||
| Marketing and advertising | 1,871 | 1,132 | 1,576 | |||||||||||||||||
| Data processing and communication | 8,500 | 7,343 | 6,611 | |||||||||||||||||
| Professional services | 1,178 | 852 | 856 | |||||||||||||||||
| Forms, printing and supplies | 644 | 625 | 683 | |||||||||||||||||
| Franchise and shares tax | 1,475 | 1,487 | 1,444 | |||||||||||||||||
| Regulatory fees | 1,317 | 1,377 | 830 | |||||||||||||||||
| Foreclosed assets, net | 453 | 505 | 556 | |||||||||||||||||
| Amortization of acquisition intangible | 1,163 | 1,360 | 1,583 | |||||||||||||||||
| Provision for credit losses on unfunded commitments | 390 | — | — | |||||||||||||||||
| Other expenses | 3,870 | 3,571 | 3,933 | |||||||||||||||||
| Total noninterest expense | 66,982 | 62,981 | 63,605 | |||||||||||||||||
| Income before income tax expense | 60,439 | 30,807 | 33,792 | |||||||||||||||||
| Income tax expense | 11,818 | 6,042 | 5,860 | |||||||||||||||||
| Net Income | $ | 48,621 | $ | 24,765 | $ | 27,932 | ||||||||||||||
| Earnings per share: | ||||||||||||||||||||
| Basic | $ | 5.80 | $ | 2.86 | $ | 3.08 | ||||||||||||||
| Diluted | $ | 5.77 | $ | 2.85 | $ | 3.05 | ||||||||||||||
| Cash dividends declared per common share | $ | 0.91 | $ | 0.88 | $ | 0.84 | ||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
46
HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| For the Years Ended December 31, | ||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Net Income | $ | 48,621 | $ | 24,765 | $ | 27,932 | ||||||||||||||
| Other Comprehensive (Loss) income | ||||||||||||||||||||
| Unrealized (losses) gains on available for sale investment securities | (7,108) | 5,580 | 3,668 | |||||||||||||||||
| Unrealized gains on cash flow hedges | 1,374 | 220 | — | |||||||||||||||||
| Tax effect | 1,204 | (1,218) | (770) | |||||||||||||||||
| Other comprehensive (loss) income, net of taxes | (4,530) | 4,582 | 2,898 | |||||||||||||||||
| Comprehensive Income | $ | 44,091 | $ | 29,347 | $ | 30,830 | ||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
47
HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| (dollars in thousands except share and per share data) | Common Stock | Additional Paid-in Capital | Unallocated Common Stock Held by ESOP | Unallocated Common Stock Held by RRP | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total | |||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | 95 | $ | 168,243 | $ | (3,481) | $ | (58) | $ | 141,447 | $ | (2,206) | $ | 304,040 | ||||||||||||||||||||||||||||||
| Net income | 27,932 | 27,932 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 2,898 | 2,898 | ||||||||||||||||||||||||||||||||||||||||||
Purchase of Company’s common stock at cost, 419,498 shares | (4) | (4,191) | (11,250) | (15,445) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared, $0.84 per share | (7,898) | (7,898) | ||||||||||||||||||||||||||||||||||||||||||
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 24,987 shares | — | 230 | (73) | 157 | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 2 | 2,229 | 2,231 | |||||||||||||||||||||||||||||||||||||||||
| RRP shares released for allocation | (23) | 23 | — | |||||||||||||||||||||||||||||||||||||||||
| ESOP shares released for allocation | 1,256 | 357 | 1,613 | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | 801 | 801 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 93 | $ | 168,545 | $ | (3,124) | $ | (35) | $ | 150,158 | $ | 692 | $ | 316,329 | ||||||||||||||||||||||||||||||
| (3,985) | (3,985) | |||||||||||||||||||||||||||||||||||||||||||
| Net income | 24,765 | 24,765 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 4,582 | 4,582 | ||||||||||||||||||||||||||||||||||||||||||
Purchase of Company’s common stock at cost, 530,504 shares | (6) | (5,299) | (8,708) | (14,013) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared, $0.88 per share | (7,903) | (7,903) | ||||||||||||||||||||||||||||||||||||||||||
Common stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 16,485 shares | — | 32 | (45) | (13) | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | 30 | 30 | |||||||||||||||||||||||||||||||||||||||||
| RRP shares released for allocation | (13) | 13 | — | |||||||||||||||||||||||||||||||||||||||||
| ESOP shares released for allocation | 904 | 357 | 1,261 | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | 789 | 789 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 87 | $ | 164,988 | $ | (2,767) | $ | (22) | $ | 154,282 | $ | 5,274 | $ | 321,842 | ||||||||||||||||||||||||||||||
| Net income | 48,621 | 48,621 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (4,530) | (4,530) | ||||||||||||||||||||||||||||||||||||||||||
Purchase of Company’s common stock at cost, 246,012 shares | (2) | (2,457) | (6,441) | (8,900) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared, $0.91 per share | (7,867) | (7,867) | ||||||||||||||||||||||||||||||||||||||||||
Common stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 28,222 shares | — | 383 | (80) | 303 | ||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | 80 | 80 | |||||||||||||||||||||||||||||||||||||||||
| RRP shares released for allocation | (9) | 9 | — | |||||||||||||||||||||||||||||||||||||||||
| ESOP shares released for allocation | 1,228 | 357 | 1,585 | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | 769 | 769 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 85 | $ | 164,982 | $ | (2,410) | $ | (13) | $ | 188,515 | $ | 744 | $ | 351,903 | ||||||||||||||||||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
48
HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended December 31, | ||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Cash flows from operating activities, net of effects of acquisitions: | ||||||||||||||||||||
| Net income | $ | 48,621 | $ | 24,765 | $ | 27,932 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Provision for loan losses | (10,161) | 12,728 | 3,014 | |||||||||||||||||
| Depreciation | 3,084 | 3,063 | 2,875 | |||||||||||||||||
| Amortization and accretion of purchase accounting valuations and intangibles | 3,527 | 5,479 | 5,880 | |||||||||||||||||
| Net amortization of mortgage servicing asset | — | 161 | 111 | |||||||||||||||||
| Federal Home Loan Bank stock dividends | (15) | (61) | (156) | |||||||||||||||||
| Net amortization of premium on investments | 1,874 | 2,900 | 2,342 | |||||||||||||||||
| Gain on sale of loans, net | (2,518) | (2,925) | (1,074) | |||||||||||||||||
| Loss on sale of assets, net | 504 | 11 | 335 | |||||||||||||||||
| Proceeds, including principal payments, from loans held for sale | 199,639 | 288,642 | 123,065 | |||||||||||||||||
| Originations of loans held for sale | (188,666) | (288,286) | (126,895) | |||||||||||||||||
| Non-cash compensation | 2,354 | 2,050 | 2,414 | |||||||||||||||||
| Deferred income tax expense (benefit) | 2,544 | (1,588) | 137 | |||||||||||||||||
| Increase in accrued interest receivable and other assets | (2,661) | (612) | (277) | |||||||||||||||||
| Increase in cash surrender value of bank-owned life insurance | (886) | (948) | (874) | |||||||||||||||||
| (Decrease) increase in accrued interest payable and other liabilities | (1,525) | 3,651 | 5,109 | |||||||||||||||||
| Net cash provided by operating activities | 55,715 | 49,030 | 43,938 | |||||||||||||||||
| Cash flows from investing activities, net of effects of acquisitions: | ||||||||||||||||||||
| Purchases of securities available for sale | (167,584) | (91,978) | (68,523) | |||||||||||||||||
| Proceeds from maturities, prepayments and calls on securities available for sale | 80,686 | 97,311 | 72,865 | |||||||||||||||||
| Proceeds from maturities, prepayments and calls on securities held to maturity | 800 | 4,130 | 3,517 | |||||||||||||||||
| Proceeds from sales on securities available for sale | 5,068 | — | — | |||||||||||||||||
| Decrease (increase) in loans, net | 133,808 | (271,830) | (73,680) | |||||||||||||||||
| Reimbursement from FDIC for covered assets | — | — | 142 | |||||||||||||||||
| Decrease in interest-bearing deposits in banks | — | 100 | 490 | |||||||||||||||||
| Proceeds from sale of foreclosed assets | 2,493 | 3,585 | 1,825 | |||||||||||||||||
| Purchases of office properties and equipment | (2,472) | (2,147) | (3,840) | |||||||||||||||||
| Proceeds from sale of office properties and equipment | 414 | 5 | 54 | |||||||||||||||||
| Purchase of bank-owned life insurance | — | — | (10,000) | |||||||||||||||||
| Proceeds from bank-owned life insurance | 1,717 | 126 | 2,163 | |||||||||||||||||
| Purchase of Federal Home Loan Bank stock | — | (1,592) | — | |||||||||||||||||
| Proceeds from redemption of Federal Home Loan Bank stock | — | 2,254 | 2,658 | |||||||||||||||||
| Net cash provided by (used in) investing activities | 54,930 | (260,036) | (72,329) | |||||||||||||||||
| Cash flows from financing activities, net of effects of acquisitions: | ||||||||||||||||||||
| Increase in deposits, net | 322,028 | 392,836 | 47,715 | |||||||||||||||||
| Borrowings on Federal Home Loan Bank advances | — | 119,700 | 6,010 | |||||||||||||||||
| Repayments of Federal Home Loan Bank advances | (2,798) | (131,526) | (24,150) | |||||||||||||||||
| Proceeds from exercise of stock options | 80 | 30 | 2,231 | |||||||||||||||||
| Issuance of stock under incentive plans | 303 | (13) | 157 | |||||||||||||||||
| Dividends paid to shareholders | (7,867) | (7,903) | (7,898) | |||||||||||||||||
| Purchase of Company’s common stock | (8,900) | (14,013) | (15,445) | |||||||||||||||||
| Net cash provided by financing activities | 302,846 | 359,111 | 8,620 | |||||||||||||||||
| Net change in cash and cash equivalents | 413,491 | 148,105 | (19,771) | |||||||||||||||||
| Cash and cash equivalents at beginning of year | 187,952 | 39,847 | 59,618 | |||||||||||||||||
| Cash and cash equivalents at end of year | $ | 601,443 | $ | 187,952 | $ | 39,847 | ||||||||||||||
| Supplementary cash flow information: | ||||||||||||||||||||
| Interest paid on deposits and borrowed funds | $ | 6,220 | $ | 11,933 | $ | 16,072 | ||||||||||||||
| Income taxes paid | 12,002 | 5,430 | 3,174 | |||||||||||||||||
| Noncash investing and financing activities: | ||||||||||||||||||||
| Loans transferred to ORE, net of charge offs | 1,979 | 869 | 3,103 | |||||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
49
HOME BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Home Bancorp, Inc., a Louisiana corporation (the “Company”), is the parent holding company for Home Bank, N.A. (the "Bank"). The Bank is a national bank and wholly owned subsidiary of the Company. The Company and Bank are headquartered in Lafayette, Louisiana. As of December 31, 2021, the Company was a bank holding company. In September 2018, the Bank established HB Investment Fund I, LLC, a wholly-owned subsidiary of the Bank to invest in New Markets Tax Credits (“NMTC”) in our market area.
In 2010, the Bank expanded into the Northshore (of Lake Pontchartrain) region through a Federal Deposit Insurance Corporation (“FDIC”) assisted acquisition of certain assets and liabilities of the former Statewide Bank. In July 2011, the Bank expanded into the Greater New Orleans region through its acquisition of GS Financial Corporation, the former holding company of Guaranty Savings Bank. In February 2014, the Bank expanded into west Mississippi through its acquisition of Britton & Koontz Capital Corporation, the holding company for Britton & Koontz Bank, N.A. of Natchez, Mississippi. In September 2015, the Bank expanded its presence in the Greater New Orleans region through the acquisition of Louisiana Bancorp, Inc., the former holding company of Bank of New Orleans of Metairie, Louisiana. In December 2017, the Bank expanded its presence in the Acadiana market through the acquisition of St. Martin Bancshares (“SMB”), the former holding company of St. Martin Bank & Trust Company of St. Martinville, Louisiana. As of December 31, 2021, the Bank conducted business from 38 banking offices in the Acadiana, Northshore, Baton Rouge and Greater New Orleans regions of south Louisiana and west Mississippi.
The Bank is primarily engaged in attracting deposits from the general public and using those funds to invest in loans and investment securities. The Bank’s principal sources of funds are customer deposits, repayments of loans, repayments of investments and funds borrowed from outside sources such as the Federal Home Loan Bank (“FHLB”) of Dallas. The Bank derives its income principally from interest earned on loans and investment securities and, to a lesser extent, from fees received in connection with the origination of loans, service charges on deposit accounts and for other services. The Bank’s primary expenses are general operating expenses and interest expense on deposits and borrowings.
The Company’s primary banking regulator is the Board of Governors of the Federal Reserve System (the”Federal Reserve”). The Bank’s primary regulator is the Office of the Comptroller of the Currency (“OCC”). Its deposits are insured to the maximum amount permissible under federal law by the FDIC.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Bank and HB Investment Fund I, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.
Subsequent Events
In January 2022, we sold the Bank's former branch office in Vicksburg, Mississippi, and transferred approximately $2.8 million in loans and $14.7 million in deposit liabilities from that office. The Company has evaluated for any additional subsequent events for potential recognition and disclosure through the date of filing for this Annual Report on Form 10-K with the U.S. Securities and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for credit losses, income taxes, the valuation of foreclosed assets and other real estate ("ORE"), goodwill and other intangible assets, acquisition accounting valuations and valuation of share-based compensation.
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Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, due from banks and interest-bearing deposits with the FHLB. The Company considers all highly liquid debt instruments with original maturities of three months or less (excluding interest-bearing deposits in banks) to be cash equivalents.
The Bank may be required to maintain cash reserves with the Federal Reserve Bank. The requirement is dependent upon the Bank’s cash on hand or noninterest-bearing balances. There was no reserve requirement as of December 31, 2021 or 2020.
Investment Securities
The Company follows the guidance under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities. This standard addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Under the topic, investment securities, which the Company both positively intends and has the ability to hold to maturity, are classified as held to maturity and carried at amortized cost.
Investment securities that are acquired with the intention of being resold in the near term are classified as trading securities under ASC 320 and are carried at fair value, with unrealized holding gains and losses recognized in current earnings. The Company did not hold any securities for trading purposes at, or during the years ended, December 31, 2021 or 2020.
Securities not meeting the criteria of either trading securities or held to maturity are classified as available for sale and are carried at fair value. Unrealized holding gains and losses for these securities are recognized, net of related income tax effects, in the Consolidated Statements of Comprehensive Income.
Interest income earned on securities either held to maturity or available for sale is included in current earnings, including the amortization of premiums and the accretion of discounts using the interest method. Amortization of premiums and accretion of discounts are recognized in interest income using the effective interest method. Premiums that exceed the amount repayable by the issuer at the next call date are amortized to the next call date. Other premiums and discounts are amortized (accreted) over the estimated lives of the securities. The gain or loss realized on the sale of securities classified as available for sale or held to maturity, as determined using the specific identification method for determining the cost of the securities sold, is computed with reference to its amortized cost and is also included in current earnings.
On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses, which introduced a new model known as CECL. ASC 326 requires expected credit related losses for available for sale debt securities to be recorded through an allowance for credit losses, while non-credit related losses or declines in fair value continue to be recognized through other comprehensive income ("OCI"). Under the new guidance, the Company is also required to evaluate held to maturity debt securities for expected credit losses.
For reporting periods beginning on and after January 1, 2020 and the adoption of ASC 326:
We evaluate our investment securities portfolio for credit-related impairment at least quarterly, and more frequently when economic and market conditions warrant such evaluations. Consideration is given to numerous factors including, but not limited to, the extent to which the fair value is less than the amortized cost basis; adverse conditions causing changes in the financial condition of the issuer of the security or underlying loan guarantors; changes to the rating of the security by a rating agency; and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost, which may extend to maturity.
The Company performs a process to determine whether declines in the fair value of securities has resulted from credit losses or other factors. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, bond credit support, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. If this evaluation indicates the existence of credit losses, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost basis, an allowance for credit losses is recorded, limited by the amount that the fair value of the security is less than its amortized cost. Subsequent changes in the allowance for credit losses on securities are recorded with a corresponding provision for credit losses on the Consolidated Statement of Income. If the Company intends to sell the debt security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the security is written down to fair value against the allowance for credit losses, with any additional impairment reported on the Consolidated Statement of Income. The Company applies the practical expedient that permits the exclusion of the accrued interest receivable balance from amortized cost basis of financing receivables.
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For reporting periods prior to January 1, 2020 and the adoption of ASC 326:
The Company reviewed investment securities for other-than-temporary impairment quarterly. Impairment was considered to be other-than-temporary if it was likely that all amounts contractually due would not be received for debt securities and when there was no positive evidence indicating that an investment’s carrying amount was recoverable in the near term for equity securities. When a decline in the fair value of available for sale and held to maturity securities below cost was deemed to be credit related, a charge for other-than-temporary impairment was included in earnings as “Other-than-temporary impairment of securities”. The decline in fair value attributed to non-credit related factors was recognized in other comprehensive income and a new cost basis for the security was established. The new cost basis was not changed for subsequent recoveries in fair value. In evaluating whether impairment was temporary or other-than-temporary, the Company considered, among other things, the time period the security was in an unrealized loss position; the financial condition of the issuer and its industry; recommendations of investment advisors; economic forecasts; market or industry trends; changes in tax laws, regulations or other governmental policies significantly affecting the issuer; any downgrades from rating agencies; and any reduction or elimination of dividends. The Company’s intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value was also considered.
Loans Held for Sale
The Company sells mortgage loans and loan participations for an amount equal to the principal amount of loans or participations with yields to investors based upon current market rates. Realized gains and losses related to loan sales are included in noninterest income.
The Company allocates the cost to acquire or originate a mortgage loan between the loan and the right to service the loan if it intends to sell or securitize the loan and retain servicing rights. In addition, the Company periodically assesses capitalized mortgage servicing rights for impairment based on the fair value of such rights. To the extent that temporary impairment exists, write-downs are recognized in current earnings as an adjustment to the corresponding valuation allowance. Permanent impairment is recognized through a write-down of the asset with a corresponding reduction in the valuation allowance. For purposes of performing its impairment evaluation, the portfolio is stratified on the basis of certain risk characteristics, including loan type and interest rates. Capitalized servicing rights are amortized over the period of, and in proportion to, estimated net servicing income, which considers appropriate prepayment assumptions.
For financial reporting purposes, the Company classifies a portion of its loans as “Mortgage loans held for sale”. Included in this category are loans which the Company has the current intent to sell and loans which are available to be sold in the event that the Company determines that loans should be sold to support the Company’s investment and liquidity objectives, as well as to support its overall asset and liability management strategies. Loans included in this category for which the Company has the current intention to sell are recorded at the lower of aggregate cost or fair value. As of December 31, 2021 and 2020, the Company had $1,104,000 and $9,559,000, respectively, in loans classified as “Mortgage loans held for sale.”
Loans
The following describes the distinction between originated and acquired loans and certain significant accounting policies relevant to each category.
Originated Loans
Originated loans are carried net of discounts on loan originations and are amortized using the level yield interest method over the remaining contractual life of the loan. Nonrefundable loan origination fees, net of direct loan origination costs, are deferred and recognized over the life of the loan as an adjustment of yield using the interest method.
Interest on loans receivable is accrued as earned using the interest method over the life of the loan. Interest on loans deemed uncollectible is excluded from income. The accrual of interest is discontinued and reversed against current income, with certain limited exceptions, once loans become more than 90 days past due or earlier if conditions warrant. The past due status of loans is determined based on the contractual terms. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged against interest income on loans. Interest payments are applied to reduce the principal balance on nonaccrual loans. Loans are returned to accrual status when all past due payments are received in full and future payments are probable.
Third party property valuations are obtained at the time of origination for real estate secured loans. When a determination is made that a loan has deteriorated to the point of being deemed a criticized or classified loan, updated valuations may be ordered to help determine if there is impairment, which may lead to a recommendation for partial charge off or appropriate
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allowance allocation. Property valuations are ordered through, and reviewed by, the Company’s Appraisal and Review Department. The Company typically orders an “as is” valuation for collateral property if the loan is in a criticized loan classification.
Loans, or portions of loans, are charged off in the period that such loans, or portions thereof, are deemed uncollectible. The collectability of individual loans is determined through an estimate of the fair value of the underlying collateral and/or assessment of the financial condition and repayment capacity of the borrower.
Acquired Loans
Acquired loans at December 31, 2021 and 2020 are those associated with our acquisitions of Statewide Bank, GS Financial Corporation, Britton & Koontz Capital Corporation, Louisiana Bancorp, Inc. and SMB. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated between those considered to be performing and those with evidence of credit deterioration (purchased credit impaired or “PCI”), and then further segregated into loan pools designed to facilitate the development of expected cash flows. The fair value estimate for each pool of acquired performing and PCI loans was based on the estimate of expected cash flows, both principal and interest, from that pool, discounted at prevailing market interest rates. The difference between the fair value of an acquired loan pool and the contractual amounts due at the acquisition date (the “fair value discount”) is accreted into income over the estimated life of the pool.
On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses, which introduced a new model known as CECL and amended the accounting guidance for purchased financial assets.
For reporting periods beginning on and after January 1, 2020 and the adoption of ASC 326:
Management estimates the allowance for credit losses for acquired loans under the same methodology as originated loans. Changes in the allowance for credit losses for acquired loans are recognized through the provision for loan losses and the provision for credit losses on unfunded lending commitments.
ASC 326 replaced the guidance for PCI loans with the concept of purchased credit deteriorated ("PCD"). For reporting periods beginning on and after January 1, 2020, PCI loans have been re-classified as PCD loans. For PCD loans, the Company applied the guidance under ASC 326 using the prospective transition approach. As a result, the Company adjusted the amortized cost basis of the PCD loans to reclassify $996,000 of purchase discount to the allowance for loan losses on January 1, 2020. The Company applied the guidance under ASC 326 using the modified retrospective approach for all non-PCD assets, which resulted in an increase in the ACL and a corresponding decrease to retained earnings at the adoption date.
PCD loans, under prior accounting policies, were excluded from nonperforming loans because they continued to earn interest income from the accretable yield at the pool level regardless of their status as past due or otherwise not in compliance with their contractual terms. With the adoption of ASC 326, the pools were discontinued and performance is based on contractual terms for individual loans.
For reporting periods prior to January 1, 2020 and the adoption of ASC 326:
Management estimated the ALL for acquired performing or non-PCI loans using a methodology similar to that used for originated loans. The allowance determined for each loan pool was compared to the remaining fair value discount for that pool. If the allowance amount calculated under the Company’s methodology was greater than the Company’s remaining discount, the additional amount called for was added to the reported allowance through a provision for loan losses. If the allowance amount calculated under the Company’s methodology was less than the Company’s recorded discount, no additional allowance or provision was recognized. Actual losses first reduced any remaining nonaccretable discount for the loan pool. Once the nonaccretable discount was fully depleted, losses were applied against the allowance established for that pool. Acquired performing or non-PCI loans were placed on nonaccrual status and were considered and reported as nonperforming or past due using the same criteria applied to the originated portfolio.
The excess of cash flows expected to be collected from a PCI loan pool over the pool’s estimated fair value at acquisition was referred to as the accretable yield and was recognized in interest income using an effective yield method over the remaining life of the pool. Each pool of PCI loans was accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
Management estimated cash flows expected to be collected on each PCI loan pool periodically. If the present value of expected cash flows for a pool was less than its carrying value, an impairment was recognized by an increase in the ALL and
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a charge to the provision for loan losses. If the present value of expected cash flows for a pool was greater than its carrying value, any previously established ALL was reversed and any remaining difference increased the accretable yield, which was taken into interest income over the remaining life of the loan pool. PCI loans were generally not subject to individual evaluation for impairment and were not reported with impaired loans, even if they otherwise qualified for such treatment.
Allowance for Credit Losses
On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses. The new standard significantly changed the impairment model for most financial assets that are measured at amortized cost, including off-balance sheet credit exposures, from an incurred loss model to an expected loss model.
For all reporting periods:
Changes in the allowance for credit losses, which includes the allowance for loan losses and the reserve for unfunded lending commitments, are charged to current operations. Loans that are determined to be uncollectible are charged-off against the allowance for loan losses once that determination is made.
While management uses available information to make allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. The OCC, as an integral part of its examination processes, periodically reviews the allowance for credit losses. The OCC may require the recognition of adjustments to the allowance for credit losses based on its judgment of information available to it as of the time of its examinations. To the extent the OCC’s estimates differ from management’s estimates, additional provisions to the allowance for credit losses may be required as of the time of its examination. As part of the Bank’s risk management program, an independent review is performed on the loan portfolio, which supplements management’s assessment of the loan portfolio and the allowance for credit losses. The result of the independent review is reported directly to the Audit Committee of the Board of Directors.
For reporting periods beginning on and after January 1, 2020 and the adoption of ASC 326:
Under ASC 326, the allowance for credit losses ("ACL") is measured on a pool basis when similar risk characteristics exist and is maintained at an amount which management believes is a current estimate of the expected credit losses for the full life of the relevant pool of loans and related unfunded lending commitments. The Company applies the practical expedient that permits the exclusion of the accrued interest receivable balance from amortized cost basis of financing receivables when measuring credit losses under CECL. The Company's CECL calculation estimates loan losses using the discounted cash flow method for all loan pools, except for the Company's credit card portfolio. Loan losses for the credit card portfolio are estimated using the remaining life method due to the limited complexity and size of this portfolio. The discounted cash flow analysis uses loan-level term information (e.g., maturity date, payment amount, interest rate, etc.) and pool-level assumptions (e.g., default rates, prepayment speeds, etc.) to produce expected future cash flows for the full life of every loan in the pool. The expected future cash flows are discounted and results are then aggregated to produce a net present value of the pool and ultimately the ACL requirement for the pool. The remaining life method applies a loss rate to a given pool of loans over the estimated remaining life of the given pool. The remaining life of the pool is based on historical data. The loss rates computed for each pool and expected pool-level funding rates are applied to the related unfunded lending commitments to calculate an ACL on unfunded amounts. For each pool of loans, management also evaluates and applies qualitative adjustments to the calculated ACL based on several factors, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and loan concentrations, changes in the volume and severity of nonperforming assets, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. During 2021 and 2020, the ongoing effects of COVID-19 on the U.S. economy have been an additional consideration when measuring the ACL.
Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis. Individually analyzed loans generally include larger (i.e., loans with balances of $500,000 or greater) commercial real estate loans, multi-family residential loans, construction and land loans, commercial and industrial loans and other loans as deemed appropriate by management for which it is probable that all amounts due under the contractual terms of the loan will not be collected. The ACL for loans that are individually evaluated is based on a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan’s original effective interest rate, observable market price for the loan or the estimated fair value of the collateral underlying certain collateral-dependent loans.
The Company has identified the following portfolio segments based on the risk characteristics described in the table for its pooled loan analysis under ASC 326:
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| Loan Pool | Risk Characteristics | |||||||
| One- to four-family first mortgage | This category consists of loans secured by first liens on residential real estate. The performance of these loans may be adversely affected by, among other factors, unemployment rates, local residential real estate market conditions and the interest rate environment. Generally, these loans are for longer terms than home equity loans and lines. | |||||||
| Home equity loans and lines | This category consists of loans secured by first and junior liens on residential real estate. The performance of these loans may be adversely affected by, among other factors, unemployment rates, local residential real estate market conditions and the interest rate environment. | |||||||
| Commercial real estate ("CRE") | This category consists of loans primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose properties, including hotels and restaurants. The performance of CRE loans may be adversely affected by, among other factors, conditions specific to the relevant industry, the real estate market for the property type and geographic region where the property or borrower is located. | |||||||
| Construction and land ("C&D") | This category consists of loans to finance the ground-up construction and/or improvement of residential and commercial properties and loans secured by land. The performance of C&D loans is generally dependent upon the successful completion of improvements and/or land development for the end user, the sale of the property to a third party, or a secondary source of cash flow from the owners. The successful completion of planned improvements and development may be adversely affected by changes in the estimated property value upon completion of construction, projected costs and other conditions leading to project delays. | |||||||
| Multi-family residential | This category consists of loans secured by apartment or residential buildings with five or more units used to accommodate households on a temporary or permanent basis. The performance of multi-family loans is generally dependent on the receipt of rental income from the tenants who occupy the subject property. The occupancy rate of the subject property and the ability of the tenants to pay rent may be adversely affected by the location of the subject property and local economic conditions. | |||||||
| Commercial and industrial ("C&I") | This category consists of secured and unsecured loans to purchase capital equipment, agriculture operating loans and other business loans for working capital and operating purposes. Secured loans are primarily secured by accounts receivable, inventory and other business assets. The performance of C&I loans may be adversely affected by, among other factors, conditions specific to the relevant industry, fluctuations in the value of the collateral and individual performance factors related to the borrower. | |||||||
| Consumer | This category consists of loans to individuals for household, family and other personal use. The performance of these loans may be adversely affected by national and local economic conditions, unemployment rates and other factors affecting the borrower's income available to service the debt. | |||||||
| Credit cards | This category consists of unsecured revolving lines of credit for personal and commercial use. Credit card loans are generally smaller in size and are less complex relative to larger loan categories. Due to their unsecured nature, historical loss rates for credit card loans are generally higher than the loss rates on loans secured by real estate. | |||||||
For reporting periods prior to January 1, 2020 and the adoption of ASC 326:
The allowance for loan losses was maintained at an amount which management believed covered the reasonably estimable and probable losses on such portfolio. The allowance for loan losses was comprised of specific and general reserves. The Company determined specific reserves based on the provisions of ASC 310, Receivables. The Company’s allowance for loan losses included a measure of impairment related to those loans specifically identified for evaluation under the topic. This measurement was based on a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan’s original effective interest rate, observable market price for the loan or the fair value of the collateral underlying certain collateral-dependent loans. General reserves were based on management’s evaluation of many factors, including current economic trends, industry experience, historical loss experience (generally three years), industry loan concentrations, the borrowers’ abilities to repay and repayment performance, probability of foreclosure and estimated collateral values. In addition to these factors, management also considered the risk factors described in the table above for each segment of the loan portfolio when determining general reserves.
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Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method with rates based on the estimated useful lives of the individual assets, which range from to 40 years. Expenditures which substantially increase the useful lives of existing property and equipment are capitalized while routine expenditures for repairs and maintenance are expensed as incurred.
On January 1, 2019, the Company adopted the amended provisions under ASC 842, Leases. Under the amended guidance, the Company recognizes lease assets and liabilities for both operating and capital leases. For lessees, lease assets represent the right to use leased assets for the relevant lease term and lease liabilities that represent the obligation to make lease payments. At December 31, 2021 and 2020, the Company's right-of-use assets, net of , were $5,256,000 and $4,566,000, respectively. The Company's lease were $5,457,000 and $4,695,000 at December 31, 2021 and 2020, respectively. The Company reports its right-of-use assets and liabilities within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively, on the Consolidated Statements of Financial Condition.
Cash Surrender Value of Bank-Owned Life Insurance
Life insurance contracts represent single premium life insurance contracts on the lives of certain officers of the Bank. The Bank is the beneficiary of these policies. These contracts are reported at their cash surrender value and changes in the cash surrender value are included in noninterest income.
Intangible Assets
Intangible assets consist of goodwill, core deposit intangibles and mortgage servicing rights. Goodwill and core deposit intangibles are presented together on the Consolidated Statements of Financial Condition. Mortgage servicing rights are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. Goodwill is not amortized but rather is evaluated for impairment at least annually. Core deposit intangibles represent the estimated value related to customer deposit relationships assumed in the Company’s acquisitions. Core deposit intangibles are being amortized over to 15 years. Core deposit intangibles are evaluated for impairment at least annually. Mortgage servicing rights represent servicing assets related to mortgage loans sold and serviced at fair value. Mortgage servicing rights are amortized over a maximum of 10 years using an accelerated method.
Foreclosed Assets and ORE
Foreclosed assets and ORE includes real property and other assets that have been acquired as a result of foreclosure, and real property no longer used in the Bank's business. Foreclosed assets are recorded at fair value less estimated selling costs at the date acquired or upon receiving new property valuations. Write-downs from cost to fair value at the date of foreclosure are charged against the allowance for credit losses. ORE is recorded at the lower of its net book value or fair value at the date of transfer to ORE. Costs relating to the development and improvement of foreclosed assets and ORE are capitalized, and costs relating to holding and maintaining foreclosed assets and ORE are expensed. Valuations are performed periodically and a charge to operations is recorded if the carrying value of a property exceeds its fair value less selling costs. Generally, the Company appraises foreclosed assets and ORE at the time of foreclosure or transfer to ORE and at least every 12 months following the foreclosure or transfer to ORE. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with ASC 610, Subtopic 20, Gains and losses from the derecognition of nonfinancial assets. The Company had $1,189,000 and $1,302,000 of foreclosed assets and ORE as of December 31, 2021 and 2020, respectively. Foreclosed assets and ORE are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
Derivatives and Hedging Activities
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to
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economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance (in ASU 2011-04), the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Other Investments
Other investments are carried at cost and consist of Federal Reserve Bank ("FRB") stock, Federal Home Loan Bank ("FHLB") stock, First National Bankers Bank ("FNBB") stock, qualified investments under the Community Reinvestment Act ("CRA"), an investment in a Small Business Investment Company ("SBIC"), and a New Market Tax Credit ("NMTC") investment. The Company's other investments are not held for sale and do not have readily determinable fair values. As a member of the FRB and the FHLB, the Company is required to hold stock in the FRB and the FHLB. The FRB stock may not be sold or pledged as collateral. The FHLB stock is pledged as collateral for outstanding FHLB advances and its transfer is substantially restricted. The Company's CRA investments include investments in funds and membership shares that fund community development in low- and moderate-income areas. The Company's SBIC investment is guaranteed by the Small Business Association. Other investments totaled $15,004,000 and $15,721,000 as of December 31, 2021 and 2020, respectively. Other investments are reported in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
Shareholders’ Equity
Provisions of the Louisiana Business Corporation Act eliminate the concept of treasury stock and provide that shares reacquired by a company are to be treated as authorized but unissued shares. For the years ended December 31, 2021, 2020 and 2019, the cost of shares repurchased by the Company has been allocated to common stock, additional paid-in capital, and retained earnings.
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
Salary Continuation Agreements
The Company records the expense associated with its salary continuation agreements over the service periods of the persons covered under these agreements.
Revenue Recognition
In addition to lending and related activities, the Company offers various services to customers that generate revenue, certain of which are governed by ASC 606, Revenue from Contracts with Customers. The Company's services that fall within the scope of ASC 606 are presented within noninterest income and include service charges and fees, brokerage fees, and other transaction-based fees. Revenue is recognized when the transactions occur or as services are performed over primarily monthly or quarterly periods. Payment is typically received in the period the transactions occur. Fees may be fixed or, where applicable, based on a percentage of transaction size.
Income Taxes
The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income taxes during the period that includes the enactment date.
In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset
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when it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable earnings and tax planning strategies.
The income tax benefit or expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.
A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits, if applicable, in noninterest expense. During the years ended December 31, 2021, 2020 and 2019, the Company did not recognize any interest or penalties in its financial statements and did not record an accrued liability for interest or penalty payments.
Investments that generate investment tax credits are accounted for under the deferral method. Under the deferral method, the allowable investment credit is recognized as a reduction in income tax expense over the life of the acquired investment.
Stock-based Compensation Plans
The Company has issued stock options under the 2009 Stock Option Plan and the 2014 Equity Incentive Plan to directors, officers and other key employees. The Company had not issued stock options under the 2021 Equity Incentive Plan as of December 31, 2021. In accordance with the requirements of ASC 718, Compensation – Stock Compensation, the Company has adopted a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured as of the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period.
The Company has issued restricted stock under the 2009 Recognition and Retention Plan and restricted stock units under the 2014 Equity Incentive Plan to directors, officers and other key employees. Awards under the plans may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned compensation related to these awards is amortized to compensation expense over the service period, which is usually the vesting period. The total share-based compensation expense for these awards is determined based on the market price of the Company’s common stock as of the date of grant applied to the total number of shares granted and is amortized over the vesting period.
Earnings Per Share
Earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.
Comprehensive Income
GAAP generally requires that recognized revenues, expenses, gains and losses be included in net earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and cash flow hedges, are reported as a separate component of the equity section of the balance sheets, such items, along with net earnings, are components of comprehensive income. The tax effect for unrealized losses and gains on investment securities and cash flow hedges was a $1,204,000 benefit, a $1,218,000 expense and a $770,000 expense for the periods ending December 31, 2021, 2020 and 2019, respectively. Comprehensive income is reflected in the Consolidated Statements of Comprehensive Income.
Loss Contingency Disclosure
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.
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Reclassifications
Certain reclassifications have been made to prior period balances to conform to the current period presentation.
Recent Accounting Pronouncements
Accounting Standards Adopted in 2021
In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)." The amendments in this ASU simplified the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improved the consistent application of and simplified GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in the ASU are effective for fiscal years and interim periods beginning after December 15, 2020. The adoption of this ASU did not impact our Consolidated Financial Statements.
Issued but Not Yet Adopted Accounting Standards
There are no applicable material accounting pronouncements recently issued that have not yet been adopted by the Company.
3. Acquisition Activity
SUMMARY OF ACQUISITION ACTIVITY
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
| Acquisition | Acquisition Date | Total Assets | Total Loans | Goodwill | Core Deposit Intangible | Total Deposits | ||||||||||||||||||||||||||||||||
| Statewide Bank | 3/12/2010 | $ | 188,026 | $ | 110,415 | $ | 560 | $ | 1,429 | $ | 206,925 | |||||||||||||||||||||||||||
| GS Financial Corporation | 7/15/2011 | 256,677 | 182,440 | 296 | 859 | 193,518 | ||||||||||||||||||||||||||||||||
Britton & Koontz Capital Corporation | 2/14/2014 | 298,930 | 161,581 | 43 | 3,030 | 216,600 | ||||||||||||||||||||||||||||||||
| Louisiana Bancorp, Inc. | 9/15/2015 | 352,897 | 281,583 | 8,454 | 1,586 | 208,670 | ||||||||||||||||||||||||||||||||
| St. Martin Bancshares, Inc. | 12/6/2017 | 592,852 | 439,872 | 49,135 | 6,766 | 533,497 | ||||||||||||||||||||||||||||||||
| Total Acquisitions | $ | 1,689,382 | $ | 1,175,891 | $ | 58,488 | $ | 13,670 | $ | 1,359,210 | ||||||||||||||||||||||||||||
Loans acquired with deteriorated credit quality were accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, prior to the adoption of ASC 326. On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses, which amended the accounting model for purchased financial assets and replaced the guidance for PCI financial assets with the concept of PCD financial assets.
Agreement and Plan of Merger with Friendswood Capital Corporation
As previously disclosed on December 15, 2021, the Company entered into a definitive agreement to expand into the Houston market with the merger of Friendswood Capital, Inc. ("Friendswood"), the holding company of Texan Bank, N. A, ("Texan Bank"). Shareholders of Friendswood will receive $15.34 per share in cash, or $66.6 million in aggregate upon consummation of the transaction. The merger with Friendswood Capital Corporation is expected to be completed in the first quarter of 2022. Upon completion of the Merger, the combined company is expected to have total assets of approximately $3.2 billion, $2.2 billion in loans and $2.7 billion in deposits.
4. Investment Securities
The following table summarizes the Company’s available for sale and held to maturity investment securities at December 31, 2021 and 2020.
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| (dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||||||
| December 31, 2021 | Less Than 1 Year | Over 1 Year | ||||||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed | $ | 234,720 | $ | 1,793 | $ | 2,382 | $ | 358 | $ | 233,773 | ||||||||||||||||||||||
| Collateralized mortgage obligations | 31,356 | 557 | 1 | — | 31,912 | |||||||||||||||||||||||||||
| Municipal bonds | 51,094 | 402 | 719 | 58 | 50,719 | |||||||||||||||||||||||||||
| U.S. government agency | 5,615 | 8 | — | 9 | 5,614 | |||||||||||||||||||||||||||
| Corporate bonds | 5,500 | 114 | — | — | 5,614 | |||||||||||||||||||||||||||
| Total available for sale | $ | 328,285 | $ | 2,874 | $ | 3,102 | $ | 425 | $ | 327,632 | ||||||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||||||||
| Municipal bonds | $ | 2,102 | $ | 30 | $ | — | $ | — | $ | 2,132 | ||||||||||||||||||||||
| Total held to maturity | $ | 2,102 | $ | 30 | $ | — | $ | — | $ | 2,132 | ||||||||||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||||||
| December 31, 2020 | Less Than 1 Year | Over 1 Year | ||||||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed | $ | 138,669 | $ | 4,162 | $ | 19 | $ | — | $ | 142,812 | ||||||||||||||||||||||
| Collateralized mortgage obligations | 74,112 | 1,565 | 55 | 2 | 75,620 | |||||||||||||||||||||||||||
| Municipal bonds | 27,306 | 717 | 12 | — | 28,011 | |||||||||||||||||||||||||||
| U.S. government agency | 6,210 | 55 | — | 10 | 6,255 | |||||||||||||||||||||||||||
| Corporate bonds | 2,000 | 54 | — | — | $ | 2,054 | ||||||||||||||||||||||||||
| Total available for sale | $ | 248,297 | $ | 6,553 | $ | 86 | $ | 12 | $ | 254,752 | ||||||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||||||||
| Municipal bonds | $ | 2,934 | $ | 62 | $ | — | $ | — | $ | 2,996 | ||||||||||||||||||||||
| Total held to maturity | $ | 2,934 | $ | 62 | $ | — | $ | — | $ | 2,996 | ||||||||||||||||||||||
Management evaluates securities for impairment from credit losses at least quarterly, and more frequently when economic and market conditions warrant such evaluations. Consideration is given to numerous factors including, but not limited to, the extent to which the fair value is less than the amortized cost basis; adverse conditions causing changes in the financial condition of the issuer of the security or underlying loan guarantors; changes to the rating of the security by a rating agency; and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost, which may extend to maturity.
The Company performs a process to determine whether the decline in the fair value of securities has resulted from credit losses or other factors. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, bond credit support, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. If this evaluation indicates the existence of credit losses, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost basis, an ACL is recorded, limited by the amount that the fair value of the security is less than its amortized cost.
The Company's investment securities with unrealized losses, aggregated by type and length of time that individual securities have been in a continuous loss position, are summarized in the following tables.
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| (dollars in thousands) | Less Than 1 Year | Over 1 Year | Total | |||||||||||||||||||||||||||||||||||
| December 31, 2021 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed | $ | 158,908 | $ | 2,382 | $ | 11,575 | $ | 358 | $ | 170,483 | $ | 2,740 | ||||||||||||||||||||||||||
| Collateralized mortgage obligations | 254 | 1 | 988 | — | 1,242 | 1 | ||||||||||||||||||||||||||||||||
| Municipal bonds | 29,047 | 719 | 1,228 | 58 | 30,275 | 777 | ||||||||||||||||||||||||||||||||
| U.S. government agency | — | — | 1,001 | 9 | 1,001 | 9 | ||||||||||||||||||||||||||||||||
| Corporate bonds | 3,499 | — | — | — | 3,499 | — | ||||||||||||||||||||||||||||||||
| Total available for sale | $ | 191,708 | $ | 3,102 | $ | 14,792 | $ | 425 | $ | 206,500 | $ | 3,527 | ||||||||||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||||||||||||||
| Municipal bonds | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
| Total held to maturity | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
| (dollars in thousands) | Less Than 1 Year | Over 1 Year | Total | |||||||||||||||||||||||||||||||||||
| December 31, 2020 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed | $ | 13,666 | $ | 19 | $ | — | $ | — | $ | 13,666 | $ | 19 | ||||||||||||||||||||||||||
| Collateralized mortgage obligations | 13,615 | 55 | 2,309 | 2 | 15,924 | 57 | ||||||||||||||||||||||||||||||||
| Municipal bonds | 1,278 | 12 | — | — | 1,278 | 12 | ||||||||||||||||||||||||||||||||
| U.S. government agency | — | — | 1,196 | 10 | 1,196 | 10 | ||||||||||||||||||||||||||||||||
| Total available for sale | $ | 28,559 | $ | 86 | $ | 3,505 | $ | 12 | $ | 32,064 | $ | 98 | ||||||||||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||||||||||||||
| Municipal bonds | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
| Total held to maturity | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
At December 31, 2021, 67 of the Company’s debt securities had unrealized losses totaling 1.7% of the individual securities’ amortized cost basis and 1.10% of the Company’s total amortized cost basis of the investment securities portfolio. At such date, seven of the 67 securities had been in a continuous loss position for over 12 months. Management has determined that the declines in the fair value of these securities were not attributable to credit losses. As a result, no ACL was recorded for available for sale investment securities at December 31, 2021.
At December 31, 2021, it was determined that no ACL was required for the Company's held to maturity investment securities. The Company monitors credit quality of debt securities held to maturity through the use of credit ratings. The following table presents the amortized cost of the Company's held to maturity securities by credit quality rating at December 31, 2021.
| Credit Ratings | ||||||||||||||||||||
| (dollars in thousands) | AAA/AA/A | BBB/BB/B | Total | |||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||
| Municipal bonds | 2,102 | — | 2,102 | |||||||||||||||||
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The amortized cost and estimated fair value by maturity of the Company’s investment securities as of December 31, 2021 are shown in the following tables. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. The expected maturity of a security may differ from its contractual maturity because of the exercise of call options and potential paydowns. Accordingly, actual maturities may differ from contractual maturities.
| (dollars in thousands) | One Year or Less | After One Year through Five Years | After Five Years through Ten Years | After Ten Years | Total | |||||||||||||||||||||||||||
| Fair Value | ||||||||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed | $ | 988 | $ | 29,148 | $ | 77,618 | $ | 126,019 | $ | 233,773 | ||||||||||||||||||||||
| Collateralized mortgage obligations | 440 | 21,451 | 1,318 | 8,703 | 31,912 | |||||||||||||||||||||||||||
| Municipal bonds | 356 | 501 | 15,912 | 33,950 | 50,719 | |||||||||||||||||||||||||||
| U.S. government agency | — | — | 5,216 | 398 | 5,614 | |||||||||||||||||||||||||||
| Corporate bonds | — | — | 5,614 | — | 5,614 | |||||||||||||||||||||||||||
| Total securities available for sale | $ | 1,784 | $ | 51,100 | $ | 105,678 | $ | 169,070 | $ | 327,632 | ||||||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||||||||
| Municipal bonds | $ | — | $ | 1,118 | $ | 1,014 | $ | — | $ | 2,132 | ||||||||||||||||||||||
| Total securities held to maturity | $ | — | $ | 1,118 | $ | 1,014 | $ | — | $ | 2,132 | ||||||||||||||||||||||
| (dollars in thousands) | One Year or Less | After One Year through Five Years | After Five Years through Ten Years | After Ten Years | Total | |||||||||||||||||||||||||||
| Amortized Cost | ||||||||||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed | $ | 988 | $ | 28,541 | $ | 77,888 | $ | 127,303 | $ | 234,720 | ||||||||||||||||||||||
| Collateralized mortgage obligations | 435 | 21,001 | 1,307 | 8,613 | 31,356 | |||||||||||||||||||||||||||
| Municipal bonds | 355 | 500 | 15,742 | 34,497 | 51,094 | |||||||||||||||||||||||||||
| U.S. government agency | — | — | 5,214 | 401 | 5,615 | |||||||||||||||||||||||||||
| Corporate bonds | — | — | 5,500 | — | 5,500 | |||||||||||||||||||||||||||
| Total securities available for sale | $ | 1,778 | $ | 50,042 | $ | 105,651 | $ | 170,814 | $ | 328,285 | ||||||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||||||||
| Municipal bonds | $ | — | $ | 1,094 | $ | 1,008 | $ | — | $ | 2,102 | ||||||||||||||||||||||
| Total securities held to maturity | $ | — | $ | 1,094 | $ | 1,008 | $ | — | $ | 2,102 | ||||||||||||||||||||||
For the year ended December 31, 2021, gross gains and losses recorded related to the sale of investment securities were $5,300 and $5,200, respectively. For the years ended December 31, 2020 and 2019, the Company recorded no gross gains or losses related to the sale of investment securities.
As of December 31, 2021 and 2020, the Company had accrued interest receivable for investment securities of $942,000 and $744,000, respectively. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
As of December 31, 2021 and 2020, the Company had $156,492,000 and $125,889,000, respectively, of securities pledged to secure public deposits.
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5. Loans
The Company’s loans, net of unearned income, consisted of the following as of December 31 of the years indicated.
| (dollars in thousands) | 2021 | 2020 | ||||||||||||
| Real estate loans: | ||||||||||||||
| One- to four-family first mortgage | $ | 350,843 | $ | 395,638 | ||||||||||
| Home equity loans and lines | 60,312 | 67,700 | ||||||||||||
| Commercial real estate | 801,624 | 750,623 | ||||||||||||
| Construction and land | 259,652 | 221,823 | ||||||||||||
| Multi-family residential | 90,518 | 87,332 | ||||||||||||
| Total real estate loans | 1,562,949 | 1,523,116 | ||||||||||||
| Other loans: | ||||||||||||||
| Commercial and industrial | 244,123 | 417,926 | ||||||||||||
| Consumer | 33,021 | 38,912 | ||||||||||||
| Total other loans | 277,144 | 456,838 | ||||||||||||
| Total loans | $ | 1,840,093 | $ | 1,979,954 | ||||||||||
The net discount on the Company’s acquired loans was $4,289,000 and $6,650,000 at December 31, 2021 and 2020, respectively. In addition, loan balances as of December 31, 2021 and 2020 are reported net of unearned income of $4,924,000 and $8,727,000, respectively. Unearned income at December 31, 2021 and December 31, 2020 included $1,301,000 and $5,449,000 of deferred lender fees related to PPP loans, respectively. The total recorded investment in PPP loans was $43,637,000 and $221,220,000 at December 31, 2021 and 2020, respectively, which is included in commercial and industrial loans.
Accrued interest receivable on the Company's loans was $6,496,000 and $8,635,000 at December 31, 2021 and 2020, respectively, and is excluded from the estimate of the ACL. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
A summary of activity in the ACL and ALL for the years ended December 31, 2021, 2020 and 2019 follows.
| For the Year Ended December 31, 2021 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | Beginning Balance | Charge-offs | Recoveries | Provision | Ending Balance | |||||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 3,065 | $ | (176) | $ | 45 | $ | (990) | $ | 1,944 | ||||||||||||||||||||||
| Home equity loans and lines | 676 | (6) | 25 | (187) | 508 | |||||||||||||||||||||||||||
| Commercial real estate | 18,851 | (1,337) | — | (7,060) | 10,454 | |||||||||||||||||||||||||||
| Construction and land | 4,155 | — | 63 | (646) | 3,572 | |||||||||||||||||||||||||||
| Multi-family residential | 1,077 | — | — | (620) | 457 | |||||||||||||||||||||||||||
| Commercial and industrial | 4,276 | (599) | 313 | (470) | 3,520 | |||||||||||||||||||||||||||
| Consumer | 863 | (187) | 146 | (188) | 634 | |||||||||||||||||||||||||||
| Total allowance for loan losses | $ | 32,963 | $ | (2,305) | $ | 592 | $ | (10,161) | $ | 21,089 | ||||||||||||||||||||||
| Unfunded lending commitments | 1,425 | — | — | 390 | 1,815 | |||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 34,388 | $ | (2,305) | $ | 592 | $ | (9,771) | $ | 22,904 | ||||||||||||||||||||||
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| For the Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Beginning Balance | ASC 326 Adoption Impact(1) | Charge-offs | Recoveries | Provision | Ending Balance | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 2,715 | $ | 986 | $ | (99) | $ | 13 | $ | (550) | $ | 3,065 | ||||||||||||||||||||||||||
| Home equity loans and lines | 1,084 | (1) | (575) | 16 | 152 | 676 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 6,541 | 1,974 | (5) | 55 | 10,286 | 18,851 | ||||||||||||||||||||||||||||||||
| Construction and land | 2,670 | 519 | (688) | — | 1,654 | 4,155 | ||||||||||||||||||||||||||||||||
| Multi-family residential | 572 | (245) | — | — | 750 | 1,077 | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 3,694 | 1,243 | (984) | 106 | 217 | 4,276 | ||||||||||||||||||||||||||||||||
| Consumer | 592 | 157 | (250) | 145 | 219 | 863 | ||||||||||||||||||||||||||||||||
| Total allowance for loan losses | $ | 17,868 | $ | 4,633 | $ | (2,601) | $ | 335 | $ | 12,728 | $ | 32,963 | ||||||||||||||||||||||||||
| Unfunded lending commitments | — | 1,425 | — | — | — | 1,425 | ||||||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 17,868 | $ | 6,058 | $ | (2,601) | $ | 335 | $ | 12,728 | $ | 34,388 | ||||||||||||||||||||||||||
(1)On January 1, 2020, the Company adopted ASC 326, Financial Instruments - Credit Losses, which introduced a new model know as CECL. Refer to Note 2 for more information on the adoption of ASC 326.
| For the Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | Beginning Balance | Charge-offs | Recoveries | Provision | Ending Balance | |||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 2,136 | $ | (4) | $ | — | $ | 583 | $ | 2,715 | ||||||||||||||||||||||
| Home equity loans and lines | 1,079 | (42) | 16 | 31 | 1,084 | |||||||||||||||||||||||||||
| Commercial real estate | 6,125 | (360) | — | 776 | 6,541 | |||||||||||||||||||||||||||
| Construction and land | 2,285 | (6) | — | 391 | 2,670 | |||||||||||||||||||||||||||
| Multi-family residential | 550 | — | — | 22 | 572 | |||||||||||||||||||||||||||
| Commercial and industrial | 3,228 | (893) | 25 | 1,334 | 3,694 | |||||||||||||||||||||||||||
| Consumer | 945 | (272) | 42 | (123) | 592 | |||||||||||||||||||||||||||
| Total allowance for loan losses | $ | 16,348 | $ | (1,577) | $ | 83 | $ | 3,014 | $ | 17,868 | ||||||||||||||||||||||
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The ACL, which includes the ALL and the ACL on unfunded lending commitments, and recorded investment in loans as of the dates indicated are as follows.
| As of December 31, 2021 | ||||||||||||||||||||
| (dollars in thousands) | Collectively Evaluated | Individually Evaluated | Total | |||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||
| One- to four-family first mortgage | $ | 1,944 | $ | — | $ | 1,944 | ||||||||||||||
| Home equity loans and lines | 508 | — | 508 | |||||||||||||||||
| Commercial real estate | 10,207 | 247 | 10,454 | |||||||||||||||||
| Construction and land | 3,572 | — | 3,572 | |||||||||||||||||
| Multi-family residential | 457 | — | 457 | |||||||||||||||||
| Commercial and industrial | 3,095 | 425 | 3,520 | |||||||||||||||||
| Consumer | 634 | — | 634 | |||||||||||||||||
| Total allowance for loan losses | $ | 20,417 | $ | 672 | $ | 21,089 | ||||||||||||||
Unfunded lending commitments(1) | $ | 1,815 | $ | — | $ | 1,815 | ||||||||||||||
| Total allowance for credit losses | $ | 22,232 | $ | 672 | $ | 22,904 | ||||||||||||||
| As of December 31, 2021 | ||||||||||||||||||||
| (dollars in thousands) | Collectively Evaluated | Individually Evaluated(2) | Total | |||||||||||||||||
| Loans: | ||||||||||||||||||||
| One- to four-family first mortgage | $ | 350,843 | $ | — | $ | 350,843 | ||||||||||||||
| Home equity loans and lines | 60,312 | — | 60,312 | |||||||||||||||||
| Commercial real estate | 797,751 | 3,873 | 801,624 | |||||||||||||||||
| Construction and land | 259,652 | — | 259,652 | |||||||||||||||||
| Multi-family residential | 90,518 | — | 90,518 | |||||||||||||||||
| Commercial and industrial | 243,379 | 744 | 244,123 | |||||||||||||||||
| Consumer | 33,021 | — | 33,021 | |||||||||||||||||
| Total loans | $ | 1,835,476 | $ | 4,617 | $ | 1,840,093 | ||||||||||||||
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| As of December 31, 2020 | ||||||||||||||||||||||||||
| (dollars in thousands) | Collectively Evaluated for Impairment | Individually Evaluated for Impairment | Acquired with Deteriorated Credit Quality | Total | ||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 2,965 | $ | 100 | $ | — | $ | 3,065 | ||||||||||||||||||
| Home equity loans and lines | 676 | — | — | 676 | ||||||||||||||||||||||
| Commercial real estate | 17,843 | 1,008 | — | 18,851 | ||||||||||||||||||||||
| Construction and land | 4,155 | — | — | 4,155 | ||||||||||||||||||||||
| Multi-family residential | 1,077 | — | — | 1,077 | ||||||||||||||||||||||
| Commercial and industrial | 3,845 | 431 | — | 4,276 | ||||||||||||||||||||||
| Consumer | 863 | — | — | 863 | ||||||||||||||||||||||
| Total allowance for loan losses | $ | 31,424 | $ | 1,539 | $ | — | $ | 32,963 | ||||||||||||||||||
Unfunded lending commitments(3) | $ | 1,425 | $ | — | $ | — | $ | 1,425 | ||||||||||||||||||
| Total allowance for credit losses | $ | 32,849 | $ | 1,539 | $ | — | $ | 34,388 | ||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||||||||
| (dollars in thousands) | Collectively Evaluated for Impairment | Individually Evaluated for Impairment | Acquired with Deteriorated Credit Quality | Total | ||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 394,632 | $ | 1,006 | $ | — | $ | 395,638 | ||||||||||||||||||
| Home equity loans and lines | 67,700 | — | — | 67,700 | ||||||||||||||||||||||
| Commercial real estate | 743,223 | 7,400 | — | 750,623 | ||||||||||||||||||||||
| Construction and land | 221,823 | — | — | 221,823 | ||||||||||||||||||||||
| Multi-family residential | 87,332 | — | — | 87,332 | ||||||||||||||||||||||
| Commercial and industrial | 417,320 | 606 | — | 417,926 | ||||||||||||||||||||||
| Consumer | 38,912 | — | — | 38,912 | ||||||||||||||||||||||
| Total loans | $ | 1,970,942 | $ | 9,012 | $ | — | $ | 1,979,954 | ||||||||||||||||||
(1)At December 31, 2021, $1.8 million of the ACL related to noncancellable unfunded lending commitments of $434.6 million. The ACL on unfunded lending commitments is recorded within accrued interest payable and other liabilities on the Consolidated Statements of Financial Condition.
(2)There were no and $277,000 PCD loans individually evaluated at December 31, 2021 and December 31, 2020, respectively.
(3)At December 31, 2020, $1.4 million of the ACL related to noncancellable unfunded lending commitments of $336.9 million. The ACL on unfunded lending commitments is recorded within accrued interest payable and other liabilities on the Consolidated Statements of Financial Condition.
Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent, in part, on values in the real estate market.
66
The following table presents the Company’s loan portfolio by credit quality classification and origination year as of December 31, 2021.
| Term Loans by Origination Year | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans | Revolving Loans Converted to Term Loans | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| One- to four-family first mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 77,865 | $ | 44,152 | $ | 45,542 | $ | 34,301 | $ | 35,048 | $ | 96,975 | $ | 12,412 | $ | 351 | $ | 346,646 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | 369 | — | — | 369 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 347 | 716 | 266 | 463 | 2,036 | — | — | 3,828 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total one- to four-family first mortgages | $ | 77,865 | $ | 44,499 | $ | 46,258 | $ | 34,567 | $ | 35,511 | $ | 99,380 | $ | 12,412 | $ | 351 | $ | 350,843 | ||||||||||||||||||||||||||||||||||||||
| Home equity loans and lines: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 1,688 | $ | 873 | $ | 1,114 | $ | 919 | $ | 816 | $ | 3,567 | $ | 50,323 | $ | 975 | $ | 60,275 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | 37 | — | — | — | 37 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total home equity loans and lines | $ | 1,688 | $ | 873 | $ | 1,114 | $ | 919 | $ | 853 | $ | 3,567 | $ | 50,323 | $ | 975 | $ | 60,312 | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 226,989 | $ | 193,637 | $ | 142,045 | $ | 68,949 | $ | 73,555 | $ | 59,396 | $ | 23,310 | $ | 1,699 | $ | 789,580 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | 1,841 | 366 | — | — | 2,207 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 437 | 821 | 381 | 1,741 | 306 | 5,991 | — | 160 | 9,837 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate loans | $ | 227,426 | $ | 194,458 | $ | 142,426 | $ | 70,690 | $ | 75,702 | $ | 65,753 | $ | 23,310 | $ | 1,859 | $ | 801,624 | ||||||||||||||||||||||||||||||||||||||
| Construction and land: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 148,054 | $ | 50,062 | $ | 48,432 | $ | 4,832 | $ | 2,867 | $ | 1,738 | $ | 2,845 | $ | — | $ | 258,830 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | 575 | — | — | — | — | — | — | — | 575 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | 5 | 242 | — | — | 247 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total construction and land loans | $ | 148,629 | $ | 50,062 | $ | 48,432 | $ | 4,832 | $ | 2,872 | $ | 1,980 | $ | 2,845 | $ | — | $ | 259,652 | ||||||||||||||||||||||||||||||||||||||
| Multi-family residential: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 31,236 | $ | 31,805 | $ | 14,467 | $ | 6,363 | $ | 2,588 | $ | 2,762 | $ | 1,297 | $ | — | $ | 90,518 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total multi-family residential loans | $ | 31,236 | $ | 31,805 | $ | 14,467 | $ | 6,363 | $ | 2,588 | $ | 2,762 | $ | 1,297 | $ | — | $ | 90,518 | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 82,765 | $ | 32,465 | $ | 14,794 | $ | 8,737 | $ | 3,066 | $ | 1,690 | $ | 96,648 | $ | 296 | $ | 240,461 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | 267 | — | 267 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 2,013 | — | 417 | 5 | 18 | 942 | — | 3,395 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial and industrial loans | $ | 82,765 | $ | 34,478 | $ | 14,794 | $ | 9,154 | $ | 3,071 | $ | 1,708 | $ | 97,857 | $ | 296 | $ | 244,123 | ||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 5,472 | $ | 2,627 | $ | 1,211 | $ | 411 | $ | 1,041 | $ | 15,530 | $ | 6,488 | $ | 37 | $ | 32,817 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | 2 | — | — | 2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 16 | — | — | — | 7 | 179 | — | — | 202 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer loans | $ | 5,488 | $ | 2,627 | $ | 1,211 | $ | 411 | $ | 1,048 | $ | 15,711 | $ | 6,488 | $ | 37 | $ | 33,021 | ||||||||||||||||||||||||||||||||||||||
| Total loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 574,069 | $ | 355,621 | $ | 267,605 | $ | 124,512 | $ | 118,981 | $ | 181,658 | $ | 193,323 | $ | 3,358 | $ | 1,819,127 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | 575 | — | — | — | 1,841 | 737 | 267 | — | 3,420 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 453 | 3,181 | 1,097 | 2,424 | 823 | 8,466 | 942 | 160 | 17,546 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | 575,097 | $ | 358,802 | $ | 268,702 | $ | 126,936 | $ | 121,645 | $ | 190,861 | $ | 194,532 | $ | 3,518 | $ | 1,840,093 | ||||||||||||||||||||||||||||||||||||||
67
The following table presents the Company’s loan portfolio by credit quality classification and origination year as of December 31, 2020.
| Term Loans by Origination Year | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term Loans | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| One- to four-family first mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 58,958 | $ | 65,070 | $ | 46,412 | $ | 48,851 | $ | 37,039 | $ | 114,588 | $ | 17,762 | $ | 1,457 | $ | 390,137 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | 167 | 16 | — | 1,057 | — | — | 1,240 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 129 | 34 | — | 335 | 1,069 | 2,694 | — | — | 4,261 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total one- to four-family first mortgages | $ | 59,087 | $ | 65,104 | $ | 46,579 | $ | 49,202 | $ | 38,108 | $ | 118,339 | $ | 17,762 | $ | 1,457 | $ | 395,638 | ||||||||||||||||||||||||||||||||||||||
| Home equity loans and lines: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 1,172 | $ | 1,307 | $ | 2,028 | $ | 964 | $ | 1,889 | $ | 5,537 | $ | 53,309 | $ | 1,389 | $ | 67,595 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | 43 | — | — | — | — | 43 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | 58 | 4 | — | 62 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total home equity loans and lines | $ | 1,172 | $ | 1,307 | $ | 2,028 | $ | 1,007 | $ | 1,889 | $ | 5,595 | $ | 53,313 | $ | 1,389 | $ | 67,700 | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 235,900 | $ | 156,646 | $ | 96,153 | $ | 102,166 | $ | 59,859 | $ | 60,720 | $ | 22,962 | $ | 56 | $ | 734,462 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | 15 | 951 | — | — | — | 966 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 1,606 | 1,994 | 1,742 | 323 | 1,344 | 8,164 | — | 22 | 15,195 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate loans | $ | 237,506 | $ | 158,640 | $ | 97,895 | $ | 102,504 | $ | 62,154 | $ | 68,884 | $ | 22,962 | $ | 78 | $ | 750,623 | ||||||||||||||||||||||||||||||||||||||
| Construction and land: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 87,540 | $ | 91,337 | $ | 16,703 | $ | 5,486 | $ | 2,585 | $ | 1,505 | $ | 1,892 | $ | 429 | $ | 207,477 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | 877 | — | — | — | — | 618 | — | 627 | 2,122 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 451 | 50 | — | — | 252 | 249 | — | 11,222 | 12,224 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total construction and land loans | $ | 88,868 | $ | 91,387 | $ | 16,703 | $ | 5,486 | $ | 2,837 | $ | 2,372 | $ | 1,892 | $ | 12,278 | $ | 221,823 | ||||||||||||||||||||||||||||||||||||||
| Multi-family residential: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 40,462 | $ | 24,329 | $ | 9,711 | $ | 3,844 | $ | 2,889 | $ | 4,539 | $ | 1,452 | $ | — | $ | 87,226 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | 106 | — | — | 106 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total multi-family residential loans | $ | 40,462 | $ | 24,329 | $ | 9,711 | $ | 3,844 | $ | 2,889 | $ | 4,645 | $ | 1,452 | $ | — | $ | 87,332 | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 264,079 | $ | 29,115 | $ | 21,053 | $ | 6,001 | $ | 3,952 | $ | 2,408 | $ | 82,039 | $ | 1,311 | $ | 409,958 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | 2,089 | 792 | 131 | — | — | 1 | 1,801 | — | 4,814 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 592 | — | 427 | 23 | 141 | 16 | 1,955 | — | 3,154 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial and industrial loans | $ | 266,760 | $ | 29,907 | $ | 21,611 | $ | 6,024 | $ | 4,093 | $ | 2,425 | $ | 85,795 | $ | 1,311 | $ | 417,926 | ||||||||||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 6,844 | $ | 2,667 | $ | 1,149 | $ | 2,073 | $ | 1,118 | $ | 18,258 | $ | 6,340 | $ | 27 | $ | 38,476 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | 4 | — | 4 | — | 13 | 120 | — | 5 | 146 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 34 | 3 | 12 | 17 | 223 | — | 1 | 290 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer loans | $ | 6,848 | $ | 2,701 | $ | 1,156 | $ | 2,085 | $ | 1,148 | $ | 18,601 | $ | 6,340 | $ | 33 | $ | 38,912 | ||||||||||||||||||||||||||||||||||||||
| Total loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 694,955 | $ | 370,471 | $ | 193,209 | $ | 169,385 | $ | 109,331 | $ | 207,555 | $ | 185,756 | $ | 4,669 | $ | 1,935,331 | ||||||||||||||||||||||||||||||||||||||
| Special Mention | 2,970 | 792 | 302 | 74 | 964 | 1,796 | 1,801 | 632 | 9,331 | |||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 2,778 | 2,112 | 2,172 | 693 | 2,823 | 11,510 | 1,959 | 11,245 | 35,292 | |||||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | 700,703 | $ | 373,375 | $ | 195,683 | $ | 170,152 | $ | 113,118 | $ | 220,861 | $ | 189,516 | $ | 16,546 | $ | 1,979,954 | ||||||||||||||||||||||||||||||||||||||
68
Age analysis of past due loans, as of the dates indicated, is as follows.
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days Past Due | Total Past Due | Current Loans | Total Loans | ||||||||||||||||||||||||||||||||
| Originated loans: | ||||||||||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 1,267 | $ | 266 | $ | 1,151 | $ | 2,684 | $ | 254,880 | $ | 257,564 | ||||||||||||||||||||||||||
| Home equity loans and lines | — | — | — | — | 48,561 | 48,561 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 438 | — | 4,854 | 5,292 | 682,323 | 687,615 | ||||||||||||||||||||||||||||||||
| Construction and land | 428 | — | — | 428 | 249,802 | 250,230 | ||||||||||||||||||||||||||||||||
| Multi-family residential | — | — | — | — | 87,316 | 87,316 | ||||||||||||||||||||||||||||||||
| Total real estate loans | 2,133 | 266 | 6,005 | 8,404 | 1,322,882 | 1,331,286 | ||||||||||||||||||||||||||||||||
| Other loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 51 | 31 | 271 | 353 | 232,569 | 232,922 | ||||||||||||||||||||||||||||||||
| Consumer | 289 | — | 25 | 314 | 29,247 | 29,561 | ||||||||||||||||||||||||||||||||
| Total other loans | 340 | 31 | 296 | 667 | 261,816 | 262,483 | ||||||||||||||||||||||||||||||||
| Total originated loans | $ | 2,473 | $ | 297 | $ | 6,301 | $ | 9,071 | $ | 1,584,698 | $ | 1,593,769 | ||||||||||||||||||||||||||
| Acquired loans: | ||||||||||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 1,233 | $ | 428 | $ | 1,322 | $ | 2,983 | $ | 90,296 | $ | 93,279 | ||||||||||||||||||||||||||
| Home equity loans and lines | 141 | — | — | 141 | 11,610 | 11,751 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 54 | — | 2,139 | 2,193 | 111,816 | 114,009 | ||||||||||||||||||||||||||||||||
| Construction and land | — | — | 241 | 241 | 9,181 | 9,422 | ||||||||||||||||||||||||||||||||
| Multi-family residential | — | — | — | — | 3,202 | 3,202 | ||||||||||||||||||||||||||||||||
| Total real estate loans | 1,428 | 428 | 3,702 | 5,558 | 226,105 | 231,663 | ||||||||||||||||||||||||||||||||
| Other loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 81 | — | 430 | 511 | 10,690 | 11,201 | ||||||||||||||||||||||||||||||||
| Consumer | 53 | 3 | 21 | 77 | 3,383 | 3,460 | ||||||||||||||||||||||||||||||||
| Total other loans | 134 | 3 | 451 | 588 | 14,073 | 14,661 | ||||||||||||||||||||||||||||||||
| Total acquired loans | $ | 1,562 | $ | 431 | $ | 4,153 | $ | 6,146 | $ | 240,178 | $ | 246,324 | ||||||||||||||||||||||||||
| Total loans: | ||||||||||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 2,500 | $ | 694 | $ | 2,473 | $ | 5,667 | $ | 345,176 | $ | 350,843 | ||||||||||||||||||||||||||
| Home equity loans and lines | 141 | — | — | 141 | 60,171 | 60,312 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 492 | — | 6,993 | 7,485 | 794,139 | 801,624 | ||||||||||||||||||||||||||||||||
| Construction and land | 428 | — | 241 | 669 | 258,983 | 259,652 | ||||||||||||||||||||||||||||||||
| Multi-family residential | — | — | — | — | 90,518 | 90,518 | ||||||||||||||||||||||||||||||||
| Total real estate loans | 3,561 | 694 | 9,707 | 13,962 | 1,548,987 | 1,562,949 | ||||||||||||||||||||||||||||||||
| Other loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 132 | 31 | 701 | 864 | 243,259 | 244,123 | ||||||||||||||||||||||||||||||||
| Consumer | 342 | 3 | 46 | 391 | 32,630 | 33,021 | ||||||||||||||||||||||||||||||||
| Total other loans | 474 | 34 | 747 | 1,255 | 275,889 | 277,144 | ||||||||||||||||||||||||||||||||
| Total loans | $ | 4,035 | $ | 728 | $ | 10,454 | $ | 15,217 | $ | 1,824,876 | $ | 1,840,093 | ||||||||||||||||||||||||||
69
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days Past Due | Total Past Due | Current Loans | Total Loans | ||||||||||||||||||||||||||||||||
| Originated loans: | ||||||||||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 1,651 | $ | 66 | $ | 365 | $ | 2,082 | $ | 258,386 | $ | 260,468 | ||||||||||||||||||||||||||
| Home equity loans and lines | 117 | 148 | — | 265 | 52,101 | 52,366 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 518 | 532 | 6,770 | 7,820 | 581,524 | 589,344 | ||||||||||||||||||||||||||||||||
| Construction and land | — | — | — | — | 207,928 | 207,928 | ||||||||||||||||||||||||||||||||
| Multi-family residential | 94 | — | — | 94 | 82,051 | 82,145 | ||||||||||||||||||||||||||||||||
| Total real estate loans | 2,380 | 746 | 7,135 | 10,261 | 1,181,990 | 1,192,251 | ||||||||||||||||||||||||||||||||
| Other loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 797 | 3 | 603 | 1,403 | 398,377 | 399,780 | ||||||||||||||||||||||||||||||||
| Consumer | 219 | 42 | 145 | 406 | 32,702 | 33,108 | ||||||||||||||||||||||||||||||||
| Total other loans | 1,016 | 45 | 748 | 1,809 | 431,079 | 432,888 | ||||||||||||||||||||||||||||||||
| Total originated loans | $ | 3,396 | $ | 791 | $ | 7,883 | $ | 12,070 | $ | 1,613,069 | $ | 1,625,139 | ||||||||||||||||||||||||||
| Acquired loans: | ||||||||||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 1,823 | $ | 502 | $ | 1,154 | $ | 3,479 | $ | 131,691 | $ | 135,170 | ||||||||||||||||||||||||||
| Home equity loans and lines | 34 | 43 | 25 | 102 | 15,232 | 15,334 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 603 | 303 | 2,462 | 3,368 | 157,911 | 161,279 | ||||||||||||||||||||||||||||||||
| Construction and land | — | — | 142 | 142 | 13,753 | 13,895 | ||||||||||||||||||||||||||||||||
| Multi-family residential | 92 | — | — | 92 | 5,095 | 5,187 | ||||||||||||||||||||||||||||||||
| Total real estate loans | 2,552 | 848 | 3,783 | 7,183 | 323,682 | 330,865 | ||||||||||||||||||||||||||||||||
| Other loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 3 | — | 907 | 910 | 17,236 | 18,146 | ||||||||||||||||||||||||||||||||
| Consumer | 126 | 50 | 66 | 242 | 5,562 | 5,804 | ||||||||||||||||||||||||||||||||
| Total other loans | 129 | 50 | 973 | 1,152 | 22,798 | 23,950 | ||||||||||||||||||||||||||||||||
| Total acquired loans | $ | 2,681 | $ | 898 | $ | 4,756 | $ | 8,335 | $ | 346,480 | $ | 354,815 | ||||||||||||||||||||||||||
| Total loans: | ||||||||||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||||||||
| One- to four-family first mortgage | $ | 3,474 | $ | 568 | $ | 1,519 | $ | 5,561 | $ | 390,077 | $ | 395,638 | ||||||||||||||||||||||||||
| Home equity loans and lines | 151 | 191 | 25 | 367 | 67,333 | 67,700 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 1,121 | 835 | 9,232 | 11,188 | 739,435 | 750,623 | ||||||||||||||||||||||||||||||||
| Construction and land | — | — | 142 | 142 | 221,681 | 221,823 | ||||||||||||||||||||||||||||||||
| Multi-family residential | 186 | — | — | 186 | 87,146 | 87,332 | ||||||||||||||||||||||||||||||||
| Total real estate loans | 4,932 | 1,594 | 10,918 | 17,444 | 1,505,672 | 1,523,116 | ||||||||||||||||||||||||||||||||
| Other loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 800 | 3 | 1,510 | 2,313 | 415,613 | 417,926 | ||||||||||||||||||||||||||||||||
| Consumer | 345 | 92 | 211 | 648 | 38,264 | 38,912 | ||||||||||||||||||||||||||||||||
| Total other loans | 1,145 | 95 | 1,721 | 2,961 | 453,877 | 456,838 | ||||||||||||||||||||||||||||||||
| Total loans | $ | 6,077 | $ | 1,689 | $ | 12,639 | $ | 20,405 | $ | 1,959,549 | $ | 1,979,954 | ||||||||||||||||||||||||||
Loans greater than 90 days past due and accruing interest were $6,000 and $2,000 at December 31, 2021 and December 31, 2020, respectively.
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The Company reviews its significant nonaccrual loans (i.e., loans with balances of $500,000 or greater) for specific impairment in accordance with its allowance for credit loss methodology. If it is determined that it is probable that all amounts due will not be collected when other credit quality indicators are considered, the loan is considered impaired and the Company individually evaluates those loans to determine the expected credit losses. The following table summarizes information pertaining to nonaccrual loans as of dates indicated.
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| (dollars in thousands) | Total | Without Related Allowance | Total | Without Related Allowance | ||||||||||||||||||||||
| Nonaccrual loans: | ||||||||||||||||||||||||||
One- to four-family first mortgage | $ | 3,575 | $ | — | $ | 3,838 | $ | — | ||||||||||||||||||
| Home equity loans and lines | 38 | — | 63 | — | ||||||||||||||||||||||
| Commercial real estate | 8,431 | 116 | 12,298 | — | ||||||||||||||||||||||
| Construction and land | 258 | — | 469 | — | ||||||||||||||||||||||
| Multi-family residential | — | — | — | — | ||||||||||||||||||||||
| Commercial and industrial | 763 | 20 | 1,717 | — | ||||||||||||||||||||||
| Consumer | 204 | — | 292 | — | ||||||||||||||||||||||
| Total | $ | 13,269 | $ | 136 | $ | 18,677 | $ | — | ||||||||||||||||||
All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. All payments received while on nonaccrual status are applied against the principal balance of nonaccrual loans. The Company does not recognize interest income while loans are on nonaccrual status.
As of December 31, 2021, the Company was not committed to lend additional funds to any customer whose loan was individually evaluated for impairment.
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Collateral Dependent Loans
The Company held loans that were individually evaluated for impairment at December 31, 2021 and 2020 for which the repayments, on the basis of our assessment at the reporting date, were expected to be provided substantially through the operation or sale of the collateral and the borrower was experiencing financial difficulty. The ACL for these collateral-dependent loans is primarily based on the fair value of the underlying collateral at the reporting date. The following describes the types of collateral that secure collateral dependent loans:
•One- to four-family first mortgages are primarily secured by first liens on residential real estate.
•Home equity loans and lines are primarily secured by first and junior liens on residential real estate.
•Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose properties, including hotels and restaurants.
•Construction and land loans are primarily secured by residential and commercial properties, which are under construction and/or redevelopment, and by raw land.
•Commercial and industrial loans considered collateral dependent are primarily secured by accounts receivable, inventory and equipment.
The table below summarizes collateral dependent loans and the related ACL as of the periods indicated for which the borrower was experiencing financial difficulty.
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| (dollars in thousands) | Loans | ACL | Loans | ACL | ||||||||||||||||||||||
One- to four-family first mortgage | $ | — | $ | — | $ | 1,006 | $ | 100 | ||||||||||||||||||
| Home equity loans and lines | — | — | — | — | ||||||||||||||||||||||
| Commercial real estate | 3,873 | 247 | 7,400 | 1,008 | ||||||||||||||||||||||
| Construction and land | — | — | — | — | ||||||||||||||||||||||
| Multi-family residential | — | — | — | — | ||||||||||||||||||||||
| Commercial and industrial | 744 | 425 | 606 | 431 | ||||||||||||||||||||||
| Consumer | — | — | — | — | ||||||||||||||||||||||
| Total | $ | 4,617 | $ | 672 | $ | 9,012 | $ | 1,539 | ||||||||||||||||||
Foreclosed Assets and ORE
Foreclosed assets and ORE include real property and other assets that have been acquired as a result of foreclosure, and real property no longer used in the Bank's business. Foreclosed assets and ORE totaled $1,189,000 and $1,302,000 at December 31, 2021 and December 31, 2020, respectively. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
The carrying amount of foreclosed residential real estate properties held at December 31, 2021 and December 31, 2020 totaled $136,000 and $877,000, respectively. Loans secured by single family residential real estate that were in the process of foreclosure at December 31, 2021 and December 31, 2020 totaled $505,000 and $446,000, respectively.
Foreclosed assets and ORE included certain bank buildings that meet the criteria to be classified as assets held for sale. The carrying value of these assets totaled $423,000 and $212,000 at December 31, 2021 and December 31, 2020, respectively. During the year ended December 31, 2021, the Company sold four of those properties, with a total carrying value of $179,000, for a loss of $26,000 recorded in foreclosed assets and ORE, net expense on the Consolidated Statements of Income. The expected timing of the sale of the remaining properties is uncertain.
Troubled Debt Restructurings
During the course of its lending operations, the Company periodically grants concessions to its customers in an attempt to protect as much of its investment as possible and to minimize risk of loss. These concessions may include restructuring the terms of a customer loan to alleviate the burden of the customer’s near-term cash requirements. Loans are TDRs when the Company agrees to restructure a loan to a borrower who is experiencing financial difficulties in a manner that is deemed to be a “concession”. The Company defines a concession as a modification of existing terms granted to a borrower for economic or
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legal reasons related to the borrower’s financial difficulties that the Company would otherwise not consider. The concession either is granted through an agreement with the customer or is imposed by a court or by law. Concessions include modifying original loan terms to reduce or defer cash payments required as part of the loan agreement, including but not limited to:
•a reduction of the stated interest rate for the remaining original life of the debt,
•an extension of the maturity date or dates at an interest rate lower than the current market rate for new debt with similar risk characteristics,
•a reduction of the face amount or maturity amount of the debt or
•a reduction of accrued interest receivable on the debt.
In its determination of whether the customer is experiencing financial difficulties, the Company considers numerous indicators, including, but not limited to:
•whether the customer is currently in default on its existing loan, or is in an economic position where it is probable the customer will be in default on its loan in the foreseeable future without a modification,
•whether the customer has declared or is in the process of declaring bankruptcy,
•whether there is substantial doubt about the customer’s ability to continue as a going concern,
•whether, based on its projections of the customer’s current capabilities, the Company believes the customer’s future cash flows will be insufficient to service the debt, including interest, in accordance with the contractual terms of the existing agreement for the foreseeable future and
•whether, without modification, the customer cannot obtain sufficient funds from other sources at an effective interest rate equal to the current market rate for similar debt for a non-troubled debtor.
If the Company concludes that both a concession has been granted and the concession was granted to a customer experiencing financial difficulties, the Company identifies the loan as a TDR. The ACL for loans that are individually evaluated is based on a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan’s original effective interest rate, observable market price for the loan or the fair value of the collateral underlying certain collateral-dependent loans. Residential, consumer and smaller balance commercial TDRs are included in the Company's pooled-loan analysis to calculate the ACL and, generally, do not have a material impact on the overall ACL.
As of December 31, 2021, the Company had modified loans with an aggregate outstanding loan balance of $3,875,000, or less than 1% of total outstanding loans, via payment relief in the nature of principal and/or interest deferrals. These modifications were done in accordance with Section 4013 of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and the Interagency Statement on Loan Modifications on Reporting for Financial Institutions Working With Customers Affected by the Coronavirus. Accordingly, these loans were not categorized as TDRs.
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A summary of information pertaining to loans modified as of the periods indicated is as follows.
| For the Year Ended December 31 | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Number of Contracts | Pre-modification Outstanding Recorded Investment | Post-modification Outstanding Recorded Investment | Number of Contracts | Pre-modification Outstanding Recorded Investment | Post-modification Outstanding Recorded Investment | ||||||||||||||||||||||||||||||||
| Troubled debt restructurings: | ||||||||||||||||||||||||||||||||||||||
One- to four-family first mortgage | 2 | $ | 77 | $ | 73 | 11 | $ | 1,409 | $ | 778 | ||||||||||||||||||||||||||||
| Home equity loans and lines | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Commercial real estate | 3 | 520 | 478 | 9 | 3,193 | 3,100 | ||||||||||||||||||||||||||||||||
| Construction and land | — | — | — | 1 | 185 | 185 | ||||||||||||||||||||||||||||||||
| Multi-family residential | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 2 | 2,397 | 2,245 | 5 | 96 | 81 | ||||||||||||||||||||||||||||||||
| Consumer | 1 | 6 | 1 | 2 | 13 | 8 | ||||||||||||||||||||||||||||||||
| Total | 8 | $ | 3,000 | $ | 2,797 | 28 | $ | 4,896 | $ | 4,152 | ||||||||||||||||||||||||||||
As of December 31, 2021 and 2020, the Company had no unfunded commitments to borrowers whose loan terms had been modified through troubled debt restructurings.
Two residential mortgages totaling $73,000 were modified during the year ended 2021 and defaulted during the same time period. The defaults did not have a significant impact on our allowance for credit losses at December 31, 2021.
Two commercial real estate loans totaling $1.7 million, seven residential mortgages totaling $490,000, one construction and land loan totaling $185,000, three commercial and industrial loans totaling $35,000 and one consumer loan totaling $4,000 were modified during the year ended December 31, 2020 and defaulted within twelve months of modification. The defaults did not have a significant impact on our allowance for loan losses at December 31, 2020.
6. Loan Servicing
Mortgage loans sold to and serviced for others are not included in the accompanying statements of financial condition. The unpaid principal balances of these loans as of December 31 of the years indicated are summarized as follows:
| (dollars in thousands) | 2021 | 2020 | ||||||||||||
| Mortgage loans sold to Federal Home Loan Mortgage Corporation without recourse | $ | 1,798 | $ | 2,633 | ||||||||||
| Mortgage loans sold to Federal National Mortgage Association without recourse | 54,429 | 78,080 | ||||||||||||
| Mortgage loans sold to Federal Home Loan Bank without recourse | 169 | 185 | ||||||||||||
| Total, end of period | $ | 56,396 | $ | 80,898 | ||||||||||
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The Company records servicing assets related to mortgage loans sold and serviced at fair value and will amortize these servicing assets over the period of estimated net servicing income associated with each loan. Management assesses servicing assets for potential impairment annually. Changes in the carrying value of servicing assets are recorded in service fees and charges on the Consolidated Statements of Income. Activity related to servicing assets for the years ended December 31, 2021, 2020 and 2019 is summarized as follows.
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Balance, beginning of period | $ | — | $ | 161 | $ | 272 | ||||||||||||||
| Amortization | — | (161) | (111) | |||||||||||||||||
| Balance, end of period | — | — | 161 | |||||||||||||||||
| Fair value, end of period | $ | — | $ | — | $ | 530 | ||||||||||||||
Custodial and escrow account balances maintained in connection with the foregoing loan servicing arrangements were $1,078,000 and $1,761,000 as of December 31, 2021 and 2020, respectively.
7. Office Properties and Equipment
Office properties and equipment consisted of the following at December 31 of the years indicated.
| (dollars in thousands) | 2021 | 2020 | ||||||||||||
| Land | $ | 13,919 | $ | 14,245 | ||||||||||
| Buildings and improvements | 36,323 | 36,880 | ||||||||||||
| Furniture and equipment | 16,486 | 15,416 | ||||||||||||
| Total office properties and equipment | 66,728 | 66,541 | ||||||||||||
| Less accumulated depreciation | 23,186 | 21,044 | ||||||||||||
| Total office properties and equipment, net | $ | 43,542 | $ | 45,497 | ||||||||||
Depreciation expense for the years ended December 31, 2021, 2020 and 2019 was $3,084,000, $3,063,000 and $2,875,000, respectively.
The Company determined that certain buildings met the criteria to be classified as assets held for sale. The carrying values of such assets were $423,000 and $212,000 at December 31, 2021 and 2020, respectively, and are reported as foreclosed assets and ORE. Foreclosed assets and ORE are recorded within accrued interest receivable and other assets in the Statements of Financial Condition as of December 31, 2021 and 2020. For more information on the Company's policy on foreclosed assets and ORE, refer to Note 2, Summary of Significant Accounting Policies.
8. Goodwill and Intangibles
Goodwill and other intangible assets are presented in the table below. Changes in carrying amount of the Company’s goodwill and core deposit intangible (“CDI”) for the years ended December 31, 2021, 2020 and 2019 were as follows.
| (dollars in thousands) | Goodwill | CDI | ||||||||||||
| Balance, December 31, 2018 | $ | 58,488 | $ | 7,567 | ||||||||||
| Amortization of intangibles | — | (1,583) | ||||||||||||
| Balance, December 31, 2019 | 58,488 | 5,984 | ||||||||||||
| Amortization of intangibles | — | (1,360) | ||||||||||||
| Balance, December 31, 2020 | 58,488 | 4,624 | ||||||||||||
| Amortization of intangibles | — | (1,163) | ||||||||||||
| Balance, December 31, 2021 | $ | 58,488 | $ | 3,461 | ||||||||||
The Company completed its annual impairment test of goodwill and other intangible assets as of December 31, 2021. The evaluation did not indicate impairment on its goodwill or other intangible assets.
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9. Deposits
The Company’s deposits consisted of the following major classifications as of December 31 of the years indicated.
| (dollars in thousands) | 2021 | 2020 | ||||||||||||
| Demand deposit accounts | $ | 766,385 | $ | 615,700 | ||||||||||
| Savings | 285,728 | 250,165 | ||||||||||||
| Money market accounts | 371,478 | 333,078 | ||||||||||||
| NOW accounts | 792,919 | 646,085 | ||||||||||||
| Certificates of deposit | 319,339 | 368,793 | ||||||||||||
| Total deposits | $ | 2,535,849 | $ | 2,213,821 | ||||||||||
As of December 31, 2021, the scheduled maturities of the Company’s certificates of deposit were as follows.
| (dollars in thousands) | Amount | |||||||
| 2022 | $ | 251,554 | ||||||
| 2023 | 45,071 | |||||||
| 2024 | 13,398 | |||||||
| 2025 | 4,216 | |||||||
| 2026 | 2,654 | |||||||
| Thereafter | 2,446 | |||||||
| Total certificates of deposit | $ | 319,339 | ||||||
The amount of our total uninsured deposits (that is, deposits in excess of the FDIC insurance limit) was $820,000,000 and $596,000,000 at December 31, 2021 and December 31, 2020, respectively. As of December 31, 2021 and 2020, the aggregate amount of certificates of deposit with balances of $250,000 or more was $63,221,000 and $69,060,000, respectively.
10. Other Borrowings
Other borrowings at December 31, 2021 and 2020 included a $5,539,000 note payable with a rate of 3.83% on the Company’s investment in a new market tax credit entity. The note payable is a 20-year leverage loan with interest-only payments for the first seven years. The note was originated in October 2018.
11. Short-term FHLB Advances
As of December 31, 2021 and 2020, the Company had no short-term FHLB advances. For the years ended December 31, 2021 and 2020, the average volume of short-term FHLB advances carried by the Company was $0 and $8,081,000, respectively.
Collateral for short and long-term FHLB advances is secured through a blanket lien evidenced by the Company’s pledge of first mortgage collateral, demand deposit accounts, capital stock and certain other assets pursuant to the “Advances, Collateral Pledge and Security Agreement.” Under this collateral pledge agreement, the Bank must meet all statutory and regulatory capital standards and must meet all FHLB credit underwriting standards. Management believes that the Bank was in compliance with all such requirements as of December 31, 2021 and 2020.
As of December 31, 2021 and 2020, the Company had $810,448,000 and $787,232,000, respectively, of additional FHLB advances available. As of December 31, 2021 and 2020, the Company had $818,764,000 and $836,829,000, respectively, of loans pledged through the Company’s blanket lien.
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12. Long-term FHLB Advances
As of December 31, 2021 and 2020, the Company’s long-term FHLB advances totaled $26,046,000 and $28,824,000, respectively. The following table summarizes long-term advances as of December 31, 2021.
| (dollars in thousands) | Amount | Weighted Average Rate | ||||||||||||
| Fixed rate advances maturing in: | ||||||||||||||
| 2022 | $ | 4,207 | 2.09 | % | ||||||||||
| 2023 | 3,036 | 1.37 | ||||||||||||
| 2024 | 4,294 | 1.74 | ||||||||||||
| 2025 | 10,911 | 1.62 | ||||||||||||
| 2026 | 3,598 | 1.65 | ||||||||||||
| Total long-term FHLB advances | $ | 26,046 | 1.69 | % | ||||||||||
13. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
The Company’s existing credit derivatives result from loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. The agreements, which are typically executed in conjunction with a participation in a loan with the same customer, allow customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members. Collateral used to support the credit risk for the underlying lending relationship is also available to offset the risk of credit risk participations and customer derivative positions.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. As part of its efforts to accomplish this objective, during the second quarter of 2020, the Company entered into certain interest rate swap agreements as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2021 and 2020, such derivatives were used to hedge the variable cash flows associated with existing variable rate liabilities.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate liabilities. During the next twelve months, the Company estimates that an additional $69,000 will be reclassified as additional interest income.
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Non-designated Hedges
The Company’s existing credit derivatives result from participations in interest rate swaps provided by external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans. For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately.
Fair Values of Derivative Instruments
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statement of Financial Condition.
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Assets(1) | Derivative Liabilities(1) | Derivative Assets(1) | Derivative Liabilities(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Notional Amount | Fair Value | Notional Amount | Fair Value | Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps - variable rate liabilities | $ | 40,000 | $ | 1,589 | $ | — | $ | — | $ | 40,000 | $ | 214 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk participation agreements | — | — | 10,000 | 43 | — | — | 10,000 | 58 | ||||||||||||||||||||||||||||||||||||||||||
| Netting adjustments | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net derivative amounts | $ | 1,589 | $ | 43 | $ | 214 | $ | 58 | ||||||||||||||||||||||||||||||||||||||||||
(1)Derivative assets and liabilities are reported at fair value in accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively, in the Consolidated Statements of Financial Condition.
Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
The following tables below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income as of December 31, 2021 and 2020.
| Year Ended December 31, 2021 | ||||||||||||||||||||||||||||||||
| Amount of Gain Recognized in OCI | Location of Gain Reclassified from AOCI into Income | Amount of Loss Reclassified from AOCI into Income | ||||||||||||||||||||||||||||||
| (dollars in thousands) | Total | Included Component | Total | Included Component | ||||||||||||||||||||||||||||
| Derivatives in cash flows hedging relationships: | ||||||||||||||||||||||||||||||||
| Interest rate swaps - variable rate liabilities | $ | 1,310 | $ | 1,310 | Interest expense | $ | (64) | $ | (64) | |||||||||||||||||||||||
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| For the Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||
| Amount of Gain Recognized in OCI | Location of Gain Reclassified from AOCI into Income | Amount of Loss Reclassified from AOCI into Income | ||||||||||||||||||||||||||||||
| (dollars in thousands) | Total | Included Component | Total | Included Component | ||||||||||||||||||||||||||||
| Derivatives in cash flows hedging relationships: | ||||||||||||||||||||||||||||||||
| Interest rate swaps - variable rate liabilities | $ | 176 | $ | 176 | Interest expense | $ | (44) | $ | (44) | |||||||||||||||||||||||
Effect of Cash Flow Hedge Accounting on the Consolidated Statements of Income
The following tables below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income as of December 31, 2021 and 2020.
| (dollars in thousands) | Location of Loss Reclassified from AOCI into Income | For the Year Ended December 31, 2021 | ||||||||||||
| Effects of cash flow hedging | ||||||||||||||
| Interest rate swaps - variable rate liabilities | Interest expense | $ | (64) | |||||||||||
| (dollars in thousands) | Location of Loss Reclassified from AOCI into Income | For the Year Ended December 31, 2020 | ||||||||||||
| Effects of cash flow hedging | ||||||||||||||
| Interest rate swaps - variable rate liabilities | Interest expense | $ | (44) | |||||||||||
Effect of Derivatives Not Designated as Hedging Instruments on the Consolidated Statements of Income
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Consolidated Statements of Income as of December 31, 2021 and 2020.
| (dollars in thousands) | Location of Income Recognized on Non-designated Hedges | For the Year Ended December 31, 2021 | ||||||||||||
| Effects of non-designated hedges | ||||||||||||||
| Risk participation agreements | Other noninterest income | $ | 16 | |||||||||||
| (dollars in thousands) | Location of Income Recognized on Non-designated Hedges | For the Year Ended December 31, 2020 | ||||||||||||
| Effects of non-designated hedges | ||||||||||||||
| Risk participation agreements | Other noninterest income | $ | 111 | |||||||||||
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company (either) defaults (or is capable of being declared in default) on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well or adequately capitalized institution, then the Company could be required to post additional collateral.
As of December 31, 2021, there were no derivatives with credit-risk-related contingent features in a net liability position. Such derivatives are measured at fair value, which includes accrued interest but excludes any adjustment for nonperformance
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risk. If the Company had breached any provisions at December 31, 2021, it would not have been required to settle any obligations under the agreements since the termination value was $0.
14. Income Taxes
The Company files federal income tax returns on a calendar year basis. Income tax expense for the years indicated is summarized as follows:
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Current | $ | 9,754 | $ | 8,030 | $ | 6,123 | ||||||||||||||
| Deferred | 2,544 | (1,588) | 137 | |||||||||||||||||
| NMTC | (480) | (400) | (400) | |||||||||||||||||
| Total income tax expense | $ | 11,818 | $ | 6,042 | $ | 5,860 | ||||||||||||||
The components of the Company’s net deferred tax asset, which is included in accrued interest receivable and other assets in the accompanying Statement of Financial Condition at December 31 of the years indicated are as follows:
| (dollars in thousands) | 2021 | 2020 | ||||||||||||
| Deferred tax assets: | ||||||||||||||
| Provision for loan losses | $ | 4,810 | $ | 5,949 | ||||||||||
| Discount on purchased loans | 584 | 1,146 | ||||||||||||
| Salary continuation plan | 678 | 700 | ||||||||||||
| Mortgage servicing rights | 64 | 80 | ||||||||||||
| Deferred compensation | 5 | 5 | ||||||||||||
| Stock-based compensation | 220 | 257 | ||||||||||||
| Unrealized loss on securities available for sale | 137 | — | ||||||||||||
ASC 326 Adoption Impact(1) | — | 1,063 | ||||||||||||
| Other | 83 | 65 | ||||||||||||
| Deferred tax assets | $ | 6,581 | $ | 9,265 | ||||||||||
| Deferred tax liabilities: | ||||||||||||||
| FHLB stock dividends | $ | (67) | $ | (64) | ||||||||||
| Accumulated depreciation | (3,369) | (3,457) | ||||||||||||
| Intangible assets | (439) | (628) | ||||||||||||
| Premium on investment securities acquired | — | — | ||||||||||||
| Unrealized gain on securities available for sale | — | (1,356) | ||||||||||||
| NMTC | (101) | (72) | ||||||||||||
| Other | (358) | (105) | ||||||||||||
| Deferred tax liabilities | (4,334) | (5,682) | ||||||||||||
| Net deferred tax asset | $ | 2,247 | $ | 3,583 | ||||||||||
(1)The company adopted ASC 326 on January 1, 2020 which included a transition adjustment, net of taxes, to retained earnings. The tax impact due to the adoption of ASC 326 shown here does not include the effect of state tax. Refer to Note 2 for more information on the adoption of ASC 326.
For the years ended December 31, 2021, 2020 and 2019, the Company’s provision for federal income taxes differed from the amount computed by applying the federal income tax statutory rate of 21% on income from operations as indicated in the following analysis:
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| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Federal tax based on statutory rate | $ | 12,773 | $ | 6,544 | $ | 7,089 | ||||||||||||||
| State tax based on statutory rate | 97 | 42 | 34 | |||||||||||||||||
| (Decrease) increase resulting from: | ||||||||||||||||||||
| NMTC | (480) | (400) | (400) | |||||||||||||||||
| Effect of tax-exempt income | (196) | (136) | (128) | |||||||||||||||||
| Changes in the cash surrender value of bank owned life insurance | (547) | (209) | (435) | |||||||||||||||||
| Nondeductible merger-related expenses | 30 | — | — | |||||||||||||||||
| Nondeductible share based compensation expense | 180 | 162 | 177 | |||||||||||||||||
| Exercise of stock options | (23) | (8) | (599) | |||||||||||||||||
| Other | (16) | 47 | 122 | |||||||||||||||||
| Income tax expense | $ | 11,818 | $ | 6,042 | $ | 5,860 | ||||||||||||||
| Effective tax rate | 19.6 | % | 19.6 | % | 17.3 | % | ||||||||||||||
Retained earnings as of December 31, 2021 and 2020, included $5,837,000 for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reductions of amounts so allocated for purposes other than bad debt losses would create income for tax purposes only, which would be subject to the then-current federal statutory income tax rate. The unrecorded deferred income tax liability on the above amount was $1,985,000 as of December 31, 2021 and 2020. Current accounting standards do not require the accrual of this deferred tax amount to be recorded unless it is probable that the reserve (for tax purposes) will be significantly depleted by loan losses deductible for tax purposes in the future. Based on current estimates of losses within the Company’s loan portfolio, accrual of the deferred tax liability associated with this reserve was not required as of December 31, 2021 and 2020.
15. Commitments
Standby letters of credit represent commitments by the Bank to meet the obligations of certain customers if called upon. The Bank normally secures its outstanding standby letters of credit with deposits from the customer. Additionally, in the normal course of business, there were various other commitments and contingent liabilities which are not reflected in the financial statements. Loan commitments are single-purpose commitments to lend which will be funded and reduced according to specified repayment schedules. Most of these commitments have maturities of less than one year.
The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit, and the undisbursed portion of construction loans as of December 31 of the years indicated.
| Contract Amount | ||||||||||||||
| (dollars in thousands) | 2021 | 2020 | ||||||||||||
| Standby letters of credit | $ | 5,075 | $ | 5,781 | ||||||||||
| Available portion of lines of credit | 320,611 | 266,349 | ||||||||||||
| Undisbursed portion of loans in process | 142,048 | 99,527 | ||||||||||||
| Commitments to originate loans | 153,487 | 139,471 | ||||||||||||
The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include certificates of deposit, property, plant and equipment and income-producing properties. There are no commitments which present an unusual risk to the Bank, and no material losses are anticipated as a result of these transactions.
16. Regulatory Matters
The Bank is subject to regulatory capital requirements administered by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken,
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could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
In July 2013, the Federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating components of capital and of computing risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The rule established a common equity Tier 1 minimum capital requirement, increased the minimum capital ratios and assigned a higher risk weight to certain assets based on the risk associated with these assets. The final rule also included a capital conservation buffer which was phased in over a five-year period until it reached 2.5% on January 1, 2019.
Dividends paid by the Bank are the primary source of funds available to the Company. Banking regulations limit the amount of dividends that may be paid without prior approval of the regulatory authorities.
Quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 risk-based capital (as defined) to average assets and risk-weighted assets (as defined). Management believes, as of December 31, 2021 and 2020, that the Bank met all capital adequacy requirements to which it was subject.
As of December 31, 2021 and 2020, the most recent notification from the OCC categorized the Bank as “well capitalized” under the OCC regulatory classification framework. To be categorized as “well capitalized,” the Bank must maintain minimum Total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The following tables present actual and required capital ratios for the the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2021 and 2020 based on the phase-in provisions of the Basel III Capital Rules as of January 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
| Actual | Minimum Capital Required – Basel III Fully Phased-In | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Bank: | ||||||||||||||||||||||||||||||||||||||
Common equity Tier 1 capital | $ | 280,788 | 14.66 | % | $ | 134,089 | 7.00 | % | $ | 124,511 | 6.50 | % | ||||||||||||||||||||||||||
Tier 1 risk-based capital | 280,788 | 14.66 | 162,822 | 8.50 | 153,245 | 8.00 | ||||||||||||||||||||||||||||||||
Total risk-based capital | 303,692 | 15.85 | 201,134 | 10.50 | 191,556 | 10.00 | ||||||||||||||||||||||||||||||||
Tier 1 leverage capital | 280,788 | 9.77 | 114,932 | 4.00 | 143,666 | 5.00 | ||||||||||||||||||||||||||||||||
| Actual | Minimum Capital Required – Basel III Fully Phased-In | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| Bank: | ||||||||||||||||||||||||||||||||||||||
Common equity Tier 1 capital | $ | 245,090 | 13.92 | % | $ | 123,263 | 7.00 | % | $ | 114,459 | 6.50 | % | ||||||||||||||||||||||||||
Tier 1 risk-based capital | 245,090 | 13.92 | 149,677 | 8.50 | 140,872 | 8.00 | ||||||||||||||||||||||||||||||||
Total risk-based capital | 267,254 | 15.18 | 184,895 | 10.50 | 176,090 | 10.00 | ||||||||||||||||||||||||||||||||
Tier 1 leverage capital | 245,090 | 9.68 | 101,247 | 4.00 | 126,559 | 5.00 | ||||||||||||||||||||||||||||||||
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17. Benefit Plans
401(k) and Profit Sharing Plan
The Company’s 401(k) defined contribution plan allows its participants to contribute up to 75% of their pretax earnings on a tax-deferred basis up to the statutory limit. The Company’s matching contributions are equal to 100% of the employee’s contributions up to 2%, plus 50% of the employees’ contributions over 2% but not over 6% of the employee’s pay. For the years ended December 31, 2021, 2020 and 2019, the Company made contributions of $974,000, $964,000 and $919,000, respectively, in connection with the plan, which is included in compensation and benefits expense in the accompanying Consolidated Statements of Income.
Employee Stock Ownership Plan
In 2008, the Company established an employee stock ownership plan (“ESOP”) for the benefit of all eligible employees of the Company. The leveraged ESOP is accounted for in accordance with the requirements of ASC 718, Compensation – Stock Compensation.
Employees of the Bank who have been employed for a month period and who have attained age 21 are eligible to participate in the ESOP. It is anticipated that contributions will be made to the ESOP in amounts necessary to amortize the debt to the Company over a period of 20 years.
Under ASC 718, unearned ESOP shares are not considered outstanding and are shown as a reduction of shareholders’ equity as unearned compensation. Dividends on unallocated ESOP shares are considered to be compensation expense. The Company recognizes compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be released. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the differential is credited to shareholders’ equity. The Company receives a tax deduction equal to the cost of the shares released. As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a Company liability.
Compensation cost related to the ESOP was $1,052,000, $726,000 and $1,085,000 for the years ended December 31, 2021, 2020 and 2019, respectively. The fair value of the unearned ESOP shares, using the closing quoted market price per share as of year-end, was approximately $10,005,000 and $7,746,000 as of December 31, 2021 and 2020, respectively. A summary of the ESOP share allocation as of December 31, 2021 and 2020 follows.
| 2021 | 2020 | |||||||||||||
| Shares allocated, beginning of year | 318,021 | 303,395 | ||||||||||||
| Shares allocated during the year | 35,708 | 35,708 | ||||||||||||
| Shares distributed during the year | (17,503) | (21,082) | ||||||||||||
| Allocated shares held by ESOP trust as of year end | 336,226 | 318,021 | ||||||||||||
| Unallocated shares | 241,026 | 276,733 | ||||||||||||
| Total ESOP shares | 577,252 | 594,754 | ||||||||||||
Salary Continuation Agreements
As a supplement to its 401(k) retirement plan, the Bank has entered into nonqualified salary continuation agreements with three executive officers of the Bank. The Bank's 2007 salary continuation agreement with its Chief Executive Officer (“CEO”) provides that the executive will receive a stated annual benefit for a period of ten years upon retirement from the Bank. Benefits under the 2007 agreement vested over ten years, with 100% of this benefit having vested in 2017. Also, effective May 20, 2019 the Bank entered into a new salary continuation agreement with its CEO, which will provide the CEO with an additional stated annual benefit for a period of ten years upon his retirement after attaining age 65. The CEO is 100% vested in his normal retirement benefit under the 2019 agreement. In the event of early retirement, the Bank will pay the CEO his vested benefits, in a lump sum on the first day of the month following the separation from service.
The Bank’s salary continuation agreement with its Chief Credit Officer ("CCO"), provides that the executive will be entitled to a stated annual benefit, distributed monthly, for a period of ten years upon retirement from the Bank after attaining age 65. Benefits under the agreement became fully vested in August 2019. In the event of early retirement, the Bank shall pay the executive his vested benefits in 120 equal monthly installments upon attaining age 65. In the event of a separation from service within 24 months following a change in control but prior to normal retirement age, the Bank shall distribute to the
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executive the vested portion of the annual benefit in a lump sum on the first day of the month following the separation from service. Benefits are subject to a six months delay to the extent required by applicable law.
On May 20, 2019 the Bank also entered into salary continuation agreement with its Chief Operations Officer ("COO"). The agreement provides that the COO will be entitled to a stated annual benefit, distributed monthly for a period of ten years upon retirement from the Bank after attaining age 65. The retirement benefits vest over a period of ten years or until the executive officer reaches age 65. In the event of early retirement, the Bank will pay the executive officer his vested benefits in a lump sum on the first day of the month following each executive officer’s separation from service. In the event of a separation from service within 24 months following a change in control of the Bank prior to reaching age 65, the Bank shall pay him an amount equal to the greater of (i) his accrued benefits as of the end of the year immediately preceding the separation from service or a stated amount. This amount will be paid in a lump sum on the first day of the month following the separation from service.
In August 2020, the Company's Chief Financial Officer ("CFO") resigned from his position with the Company and the Bank. Prior to the his resignation, the Bank was under a salary continuation agreement with the CFO. Under the terms of the agreement, the Company will pay his vested benefits of $36,000 in one lump sum on March 1, 2021.
Britton & Koontz Capital Corporation had two salary continuation agreements funded in the amount of $465,000 at the time of acquisition in February 2014. Former executives of Britton & Koontz Capital Corporation or their beneficiaries are being paid over 15 years from the time of acquisition in February 2014. Louisiana Bancorp, Inc. also had two salary continuation agreements funded in the amount of $1,200,000 at the time of acquisition in September 2015. The Bank will pay former executives of Louisiana Bancorp, Inc. or their beneficiary within 10 years subsequent to the time of the acquisition in September 2015. SMB had a salary continuation agreement for an executive officer related to its acquisition of American Bank in 2007. The former executive of American Bank or his beneficiaries are being paid $358,000 over 14 years from the time of the SMB acquisition in December 2017.
The Company had an outstanding liability totaling $3,229,000 and $3,331,000 as of December 31, 2021 and 2020, respectively, in connection with the agreements, which is included in accrued interest payable and other liabilities in the accompanying statements of financial condition.
18. Stock-based Payment Arrangements
The Company’s shareholders approved the 2009 Stock Option Plan (the “SOP”) and the 2009 Recognition and Retention Plan (the “RRP”) on May 12, 2009 to provide incentives and awards for directors, officers, and other key employees of the Company and its subsidiary. A maximum of 892,687 shares of Company common stock were reserved for issuance upon the exercise of options granted under the SOP. A total of 357,075 shares of the Company’s outstanding common stock, or 4% of total shares outstanding at the time the RRP was implemented, were approved for restricted stock awards under the RRP. The SOP and RRP expired February 2019. Expiration of the SOP and RRP did not affect any unvested options or awards granted. On May 6, 2014, the Company’s shareholders approved the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan authorizes the granting of stock options, restricted stock units and other awards to directors, officers and other key employees. The aggregate number of shares of our common stock reserved and available for issuance pursuant to awards granted under the 2014 Plan is 350,000. On May 5, 2021, the Company’s shareholders approved the 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan authorizes the granting of stock options, restricted stock units and other awards to directors, officers and other key employees. The aggregate number of shares of our common stock reserved and available for issuance pursuant to awards granted under the 2021 Plan is 435,000. These plans are administered by a committee appointed by the Board of Directors, which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions and other provisions of the awards. In accordance with ASC 718, the Company adopted a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured as of the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period.
Stock Option Plans
The Company has issued stock options under the SOP and the 2014 Plan to directors, officers and other key employees. The option exercise price cannot be less than the fair value of the underlying common stock as of the date of the option grant and the maximum option term cannot exceed ten years. All stock options granted have been issued with vesting periods of five years with accelerated vesting provided under certain circumstances. As of December 31, 2021, options to acquire an aggregate of 213,857 shares were outstanding under the SOP and the 2014 Plan.
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The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model. This model requires management to make certain assumptions, including the expected life of the option, the risk-free rate of interest, the expected volatility and the expected dividend yield. The following weighted-average assumptions were used for option awards issued during the years ended December 31:
| 2021 | 2020 | 2019 | |||||||||
| Expected dividends | 2.50% | 3.95% | 2.34% | ||||||||
| Expected volatility | 33.77% | 24.65% | 21.44% | ||||||||
| Risk-free interest rate | 1.2% | 7.0% | 2.2% | ||||||||
| Expected term (in years) | 6.5 | 6.5 | 6.5 | ||||||||
As of December 31, 2021, there was $487,000 of unrecognized compensation cost related to stock options which is expected to be recognized over a period of 3.4 years.
For the years ended December 31, 2021, 2020 and 2019, the Company recognized $220,000, $216,000 and $200,000, respectively, in compensation cost related to stock options, which is included in compensation and benefits expense in the accompanying consolidated statements of income.
The following table represents stock option activity for the years indicated.
| Options | Number of Options | Weighted-Average Exercise Price | Weighted-Average Grant Date Fair Value | Weighted-Average Remaining Contractual Term (Years) | ||||||||||||||||||||||
| Outstanding as of December 31, 2018 | 352,370 | $ | 19.78 | $ | 5.05 | |||||||||||||||||||||
| Granted | 38,180 | 35.78 | 6.52 | |||||||||||||||||||||||
| Exercised | (198,786) | 12.52 | 3.85 | |||||||||||||||||||||||
| Forfeited | (11,179) | 33.13 | 6.79 | |||||||||||||||||||||||
| Outstanding as of December 31, 2019 | 180,585 | $ | 30.33 | $ | 6.57 | 6.6 | ||||||||||||||||||||
| Granted | 35,850 | 22.34 | 3.03 | |||||||||||||||||||||||
| Exercised | (4,625) | 21.33 | 5.30 | |||||||||||||||||||||||
| Forfeited | (7,270) | 29.47 | 5.58 | |||||||||||||||||||||||
| Outstanding as of December 31, 2020 | 204,540 | $ | 29.17 | $ | 6.02 | 6.2 | ||||||||||||||||||||
| Granted | 37,970 | 36.84 | 9.58 | |||||||||||||||||||||||
| Exercised | (19,941) | 24.72 | 5.20 | |||||||||||||||||||||||
| Forfeited | (8,712) | 34.35 | 6.98 | |||||||||||||||||||||||
| Outstanding as of December 31, 2021 | 213,857 | $ | 30.73 | $ | 6.69 | 6.0 | ||||||||||||||||||||
| Exercisable as of December 31, 2019 | 86,401 | $ | 24.73 | $ | 5.94 | 5.1 | ||||||||||||||||||||
| Exercisable as of December 31, 2020 | 113,988 | 27.07 | 6.16 | 4.8 | ||||||||||||||||||||||
| Exercisable as of December 31, 2021 | 125,601 | 28.66 | 6.28 | 4.5 | ||||||||||||||||||||||
Restricted Stock Plans
The Company has issued restricted stock under the RRP to directors, officers and other key employees. During 2009, the Company purchased in the open market all shares required to fund the RRP at an average cost of $11.81 per share. As of December 31, 2021, the cost of such shares held by the RRP totaled $13,000, which is included in the Company’s unallocated common stock held by the RRP in the consolidated statements of financial condition. Under the 2014 Plan, the Company may issue restricted stock units, restricted stock awards, options and other awards.
Awards under the RRP and the 2014 Plan may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned compensation related to these awards is amortized to compensation expense over the -year vesting period. The total share-based compensation expense for these awards is determined based on the market price of the Company’s common
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stock as of the date of grant applied to the total number of shares granted and is amortized over the vesting period. As of December 31, 2021, unearned share-based compensation associated with these awards totaled $1,212,000.
For the years ended December 31, 2021, 2020 and 2019, the Company recognized $549,000, $573,000 and $602,000, respectively, in compensation cost related to restricted stock and restricted stock units, which is included in compensation and benefits expense in the accompanying consolidated statements of income.
The following table represents unvested restricted stock activity for the years indicated.
| Restricted Stock | Number of Shares | Weighted-Average Grant Date Fair Value | ||||||||||||
| Balance, December 31, 2018 | 55,380 | $ | 34.36 | |||||||||||
| Granted | 19,145 | 35.84 | ||||||||||||
| Forfeited | (4,336) | 36.01 | ||||||||||||
| Released | (18,711) | 31.79 | ||||||||||||
| Balance, December 31, 2019 | 51,478 | $ | 35.73 | |||||||||||
| Granted | 17,305 | 22.19 | ||||||||||||
| Forfeited | (5,183) | 33.06 | ||||||||||||
| Released | (19,247) | 32.77 | ||||||||||||
| Balance, December 31, 2020 | 44,353 | $ | 32.04 | |||||||||||
| Granted | 21,365 | 36.90 | ||||||||||||
| Forfeited | (3,937) | 32.76 | ||||||||||||
| Released | (15,574) | 32.95 | ||||||||||||
| Balance, December 31, 2021 | 46,207 | $ | 33.93 | |||||||||||
19. Earnings Per Share
Earnings per common share was computed based on the following:
| Years Ended December 31, | ||||||||||||||||||||
| (dollars in thousands, except per share data) | 2021 | 2020 | 2019 | |||||||||||||||||
| Numerator: | ||||||||||||||||||||
| Income applicable to common shares | $ | 48,621 | $ | 24,765 | $ | 27,932 | ||||||||||||||
| Denominator: | ||||||||||||||||||||
| Weighted average common shares outstanding | 8,379 | 8,674 | 9,074 | |||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||
| Restricted stock | 12 | 9 | 12 | |||||||||||||||||
| Stock options | 37 | 21 | 60 | |||||||||||||||||
| Weighted average common shares outstanding - assuming dilution | 8,428 | 8,704 | 9,146 | |||||||||||||||||
| Earnings per common share | $ | 5.80 | $ | 2.86 | $ | 3.08 | ||||||||||||||
| Earnings per common share - assuming dilution | $ | 5.77 | $ | 2.85 | $ | 3.05 | ||||||||||||||
Options on 97,836, 134,714 and 92,420 shares of common stock were not included in computing diluted earnings per share for the years ended December 31, 2021, 2020 and 2019, respectively, because the effect of these shares was anti-dilutive.
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20. Related Party Transactions
Certain directors and officers of the Company are customers of the Company. Loan transactions with directors, officers and employees are made on the same terms as those prevailing at the time for comparable loans to other persons. A summary of related party loan activity during 2021 and 2020 follows.
| (dollars in thousands) | 2021 | 2020 | |||||||||
| Balance, beginning of year | $ | 8,355 | $ | 6,215 | |||||||
| New loans | 1,954 | 1,185 | |||||||||
| Change in related parties, net | 2,202 | 1,806 | |||||||||
| Repayments, net | (2,784) | (851) | |||||||||
| Balance, end of year | $ | 9,727 | $ | 8,355 | |||||||
None of the related party loans were identified as impaired or exceeded 5% of shareholders’ equity for the years ended 2021 or 2020.
Related party deposits totaled $11,794,000 and $6,610,000 as of December 31, 2021 and 2020, respectively.
21. Fair Value Measurements and Disclosures
The Company values its financial assets and liabilities measured at fair value in three levels as required by ASC 820, Fair Value Measurements and Disclosures. Under this guidance, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•Level 1 – Quoted prices in active markets for identical assets or liabilities.
•Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•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. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities quarterly.
Recurring Basis
Investment Securities Available for Sale
Fair values of investment securities available for sale are primarily measured using information from a third-party pricing service. This pricing service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications. If quoted prices are available in an active market, investment securities are classified as Level 1 measurements. If quoted prices are not available in an active market, fair values were estimated primarily by the use of pricing models. Level 2 investment securities were primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises. In certain cases, where there is limited or less transparent information provided by the Company’s third-party pricing service, fair value is estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes. Investment securities are classified within Level 3 when little or no market activity supports the fair value.
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Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the investment securities being valued. As of December 31, 2021, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.
Derivative Assets and Liabilities
The fair value of these derivative financial instruments is obtained from a third-party pricing service that uses widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
The following tables present the balances of assets and liabilities measured on a recurring basis as of December 31, 2021 and 2020 aggregated by the level in the fair value hierarchy in which these measurements fall.
| (dollars in thousands) | December 31, 2021 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Available for sale securities: | ||||||||||||||||||||||||||
| U.S. agency mortgage-backed | $ | 233,773 | $ | — | $ | 233,773 | $ | — | ||||||||||||||||||
| Collateralized mortgage obligations | 31,912 | — | 31,912 | — | ||||||||||||||||||||||
| Municipal bonds | 50,719 | — | 50,719 | — | ||||||||||||||||||||||
| U.S. government agency | 5,614 | — | 5,614 | — | ||||||||||||||||||||||
| Corporate bonds | 5,614 | — | 5,614 | — | ||||||||||||||||||||||
| Total available for sale securities | $ | 327,632 | $ | — | $ | 327,632 | $ | — | ||||||||||||||||||
Derivative assets(1) | $ | 1,589 | $ | — | $ | 1,589 | $ | — | ||||||||||||||||||
| Total | $ | 329,221 | $ | — | $ | 329,221 | $ | — | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
Derivative liabilities(1) | $ | 43 | $ | — | $ | 43 | $ | — | ||||||||||||||||||
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| (dollars in thousands) | December 31, 2020 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Available for sale securities: | ||||||||||||||||||||||||||
| U.S. agency mortgage-backed | $ | 142,812 | $ | — | $ | 142,812 | $ | — | ||||||||||||||||||
| Collateralized mortgage obligations | 75,620 | — | 75,620 | — | ||||||||||||||||||||||
| Municipal bonds | 28,011 | — | 28,011 | — | ||||||||||||||||||||||
| U.S. government agency | 6,255 | — | 6,255 | — | ||||||||||||||||||||||
| Corporate bonds | 2,054 | — | 2,054 | — | ||||||||||||||||||||||
| Total available for sale securities | $ | 254,752 | $ | — | $ | 254,752 | $ | — | ||||||||||||||||||
Derivative assets(1) | $ | 214 | $ | — | $ | 214 | $ | — | ||||||||||||||||||
| Total | $ | 254,966 | $ | — | $ | 254,966 | $ | — | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
Derivative liabilities(1) | $ | 58 | $ | — | $ | 58 | $ | — | ||||||||||||||||||
Nonrecurring Basis
The Company records loans individually evaluated for impairment at fair value on a nonrecurring basis. A loan is considered impaired if it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value is measured at the fair value of the collateral for collateral-dependent loans. For non-collateral-dependent loans, fair value is measured by present valuing expected future cash flows. Impaired loans are classified as Level 3 assets when measured using appraisals from third parties of the collateral less any prior liens and when there is no observable market price.
Foreclosed assets and ORE are also recorded at fair value on a nonrecurring basis. Foreclosed assets are initially recorded at fair value less estimated costs to sell. ORE is recorded at the lower of its net book value or fair value at the date of transfer to ORE. The fair value of foreclosed assets and ORE is based on property appraisals and an analysis of similar properties available. As such, the Company classifies foreclosed and ORE assets as Level 3 assets.
The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the tables below.
| Fair Value Measurements Using | ||||||||||||||||||||||||||
| (dollars in thousands) | December 31, 2021 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Loans individually evaluated for impairment | $ | 3,945 | $ | — | $ | — | $ | 3,945 | ||||||||||||||||||
| Foreclosed assets and ORE | 1,189 | — | — | 1,189 | ||||||||||||||||||||||
| Total | $ | 5,134 | $ | — | $ | — | $ | 5,134 | ||||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||||||||||||
| (dollars in thousands) | December 31, 2020 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Loans individually evaluated for impairment | $ | 7,473 | $ | — | $ | — | $ | 7,473 | ||||||||||||||||||
| Foreclosed assets and ORE | 1,302 | — | — | 1,302 | ||||||||||||||||||||||
| Total | $ | 8,775 | $ | — | $ | — | $ | 8,775 | ||||||||||||||||||
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The following tables show significant unobservable inputs used in the fair value measurement of Level 3 assets.
| (dollars in thousands) | Fair Value | Valuation Technique | Unobservable Inputs | Range of Discounts | Weighted Average Discount | |||||||||||||||||||||||||||
| As of December 31, 2021 | ||||||||||||||||||||||||||||||||
| Loans individually evaluated for impairment | $ | 3,945 | Third party appraisals and discounted cash flows | Collateral values, market discounts and estimated costs to sell | 0% - 100% | 15 | % | |||||||||||||||||||||||||
| Foreclosed assets and ORE | $ | 1,189 | Third party appraisals, sales contracts, broker price opinions | Collateral values, market discounts and estimated costs to sell | 6% - 16% | 12 | % | |||||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Valuation Technique | Unobservable Inputs | Range of Discounts | Weighted Average Discount | |||||||||||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||||||||||||||
| Loans individually evaluated for impairment | $ | 7,473 | Third party appraisals and discounted cash flows | Collateral values, market discounts and estimated costs to sell | 3% - 87% | 17 | % | |||||||||||||||||||||||||
| Foreclosed assets and ORE | $ | 1,302 | Third party appraisals, sales contracts, broker price opinions | Collateral values, market discounts and estimated costs to sell | 6% - 42% | 11 | % | |||||||||||||||||||||||||
ASC 820, Fair Value Measurements and Disclosures, requires the disclosure of each class of financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement element. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
•The carrying value of cash and cash equivalents and interest-bearing deposits in banks approximate their fair value.
•The fair value for investment securities is determined from quoted market prices when available. If a quoted market price is not available, fair value is estimated using third party pricing services or quoted market prices of securities with similar characteristics.
•The carrying value of mortgage loans held for sale approximates their fair value.
•The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturity.
•The cash surrender value of BOLI approximates its fair value.
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•The fair value of customer deposits, excluding certificates of deposit, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
•The fair value of other borrowings and long-term FHLB advances is estimated by discounting the future cash flows using the rates currently offered for borrowings of similar maturities.
•The fair value of derivative assets and liabilities are obtained from a third-party pricing service that uses the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).
The fair value of off-balance sheet financial instruments as of December 31, 2021 and 2020 was immaterial.
| Fair Value Measurements at December 31, 2021 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | Carrying Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
| Financial Assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 601,443 | $ | 601,443 | $ | 601,443 | $ | — | $ | — | ||||||||||||||||||||||
| Interest-bearing deposits in banks | 349 | 349 | 349 | — | — | |||||||||||||||||||||||||||
| Investment securities available for sale | 327,632 | 327,632 | — | 327,632 | — | |||||||||||||||||||||||||||
| Investment securities held to maturity | 2,102 | 2,132 | — | 2,132 | — | |||||||||||||||||||||||||||
| Mortgage loans held for sale | 1,104 | 1,104 | — | 1,104 | — | |||||||||||||||||||||||||||
| Loans, net | 1,819,004 | 1,834,023 | — | 1,830,078 | 3,945 | |||||||||||||||||||||||||||
| Cash surrender value of BOLI | 40,361 | 40,361 | 40,361 | — | — | |||||||||||||||||||||||||||
Derivative assets(1) | 1,589 | 1,589 | — | 1,589 | — | |||||||||||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||||||||||||||
| Deposits | $ | 2,535,849 | $ | 2,533,951 | $ | — | $ | 2,533,951 | $ | — | ||||||||||||||||||||||
| Other borrowings | 5,539 | 5,860 | — | 5,860 | — | |||||||||||||||||||||||||||
| Long-term FHLB advances | 26,046 | 26,263 | — | 26,263 | — | |||||||||||||||||||||||||||
Derivative liabilities(1) | 43 | 43 | — | 43 | — | |||||||||||||||||||||||||||
| Fair value Measurements at December 31, 2020 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | Carrying Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
| Financial Assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 187,952 | $ | 187,952 | $ | 187,952 | $ | — | $ | — | ||||||||||||||||||||||
| Interest-bearing deposits in banks | 349 | 349 | 349 | — | — | |||||||||||||||||||||||||||
| Investment securities available for sale | 254,752 | 254,752 | — | 254,752 | — | |||||||||||||||||||||||||||
| Investment securities held to maturity | 2,934 | 2,996 | — | 2,996 | — | |||||||||||||||||||||||||||
| Mortgage loans held for sale | 9,559 | 9,559 | — | 9,559 | — | |||||||||||||||||||||||||||
| Loans, net | 1,946,991 | 1,957,705 | — | 1,950,232 | 7,473 | |||||||||||||||||||||||||||
| Cash surrender value of BOLI | 40,334 | 40,334 | 40,334 | — | — | |||||||||||||||||||||||||||
Derivative assets(1) | 214 | 214 | — | 214 | — | |||||||||||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||||||||||||||
| Deposits | $ | 2,213,821 | $ | 2,216,002 | $ | — | $ | 2,216,002 | $ | — | ||||||||||||||||||||||
| Other borrowings | 5,539 | 6,224 | — | 6,224 | — | |||||||||||||||||||||||||||
| Long-term FHLB advances | 28,824 | 29,662 | — | 29,662 | — | |||||||||||||||||||||||||||
Derivative liabilities(1) | 58 | 58 | — | 58 | — | |||||||||||||||||||||||||||
(1)Derivative assets and liabilities are reported at fair value in accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively, in the Consolidated Statements of Financial Condition.
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22. Condensed Parent Company Only Financial Statements
Condensed financial statements of Home Bancorp, Inc. (parent company only) are shown below. The parent company has no significant operating activities.
Condensed Balance Sheets
December 31, 2021 and 2020
| (dollars in thousands) | 2021 | 2020 | ||||||||||||
| Assets | ||||||||||||||
| Cash in bank | $ | 2,043 | $ | 3,048 | ||||||||||
| Investment in subsidiary | 343,481 | 313,476 | ||||||||||||
| Other assets | 6,424 | 5,366 | ||||||||||||
| Total assets | $ | 351,948 | $ | 321,890 | ||||||||||
| Liabilities | $ | 45 | $ | 48 | ||||||||||
| Shareholders’ equity | 351,903 | 321,842 | ||||||||||||
| Total liabilities and shareholders’ equity | $ | 351,948 | $ | 321,890 | ||||||||||
Condensed Statements of Income
For the Years Ended December 31, 2021, 2020 and 2019
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Operating income | ||||||||||||||||||||
| Interest income | $ | — | $ | — | $ | — | ||||||||||||||
| Dividend from subsidiary | 15,000 | 18,200 | 21,000 | |||||||||||||||||
| Total operating income | 15,000 | 18,200 | 21,000 | |||||||||||||||||
| Operating expenses | ||||||||||||||||||||
| Other expenses | 183 | 234 | 192 | |||||||||||||||||
| Total operating expenses | 183 | 234 | 192 | |||||||||||||||||
| Income before income tax benefit and equity in undistributed earnings of subsidiary | 14,817 | 17,966 | 20,808 | |||||||||||||||||
| Income tax benefit | 38 | 49 | 40 | |||||||||||||||||
| Income before equity in undistributed earnings of subsidiary | 14,855 | 18,015 | 20,848 | |||||||||||||||||
| Undistributed earnings of subsidiary | 33,766 | 6,750 | 7,084 | |||||||||||||||||
| Net income | $ | 48,621 | $ | 24,765 | $ | 27,932 | ||||||||||||||
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Condensed Statements of Cash Flows
For the Years Ended December 31, 2021, 2020 and 2019
| (dollars in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Cash flows from operating activities | ||||||||||||||||||||
| Net income | $ | 48,621 | $ | 24,765 | $ | 27,932 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Non-cash compensation | 1,585 | 1,261 | 1,613 | |||||||||||||||||
| Increase in accrued interest receivable and other assets | (1,058) | (753) | (1,118) | |||||||||||||||||
| Undistributed earnings in subsidiary | (33,766) | (6,750) | (7,084) | |||||||||||||||||
| (Decrease) increase in accrued expenses and other liabilities | (3) | 24 | 14 | |||||||||||||||||
| Net cash provided by operating activities | 15,379 | 18,547 | 21,357 | |||||||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||
| Proceeds from exercise of stock options | 80 | 30 | 2,231 | |||||||||||||||||
| Payment of dividends on common stock | (7,867) | (7,903) | (7,898) | |||||||||||||||||
| Issuance of stock under incentive plan | 303 | (13) | 157 | |||||||||||||||||
| Purchase of Company’s common stock | (8,900) | (14,013) | (15,445) | |||||||||||||||||
| Net cash used in financing activities | (16,384) | (21,899) | (20,955) | |||||||||||||||||
| Net change in cash and cash equivalents | (1,005) | (3,352) | 402 | |||||||||||||||||
| Cash and cash equivalents at beginning of year | 3,048 | 6,400 | 5,998 | |||||||||||||||||
| Cash and cash equivalents at end of year | $ | 2,043 | $ | 3,048 | $ | 6,400 | ||||||||||||||
23. Consolidated Quarterly Results of Operations (unaudited)
During the fourth quarter of 2020, we revised our estimate of losses on unfunded lending commitments. As a result, certain reclassifications have been made to prior period results to allow for comparability across quarterly periods during 2020. Refer to Note 2 for more information.
| (dollars in thousands, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||
| Year Ended December 31, 2021 | ||||||||||||||||||||||||||
| Total interest income | $ | 26,928 | $ | 25,763 | $ | 28,423 | $ | 25,788 | ||||||||||||||||||
| Total interest expense | 1,833 | 1,653 | 1,289 | 1,138 | ||||||||||||||||||||||
| Net interest income | 25,095 | 24,110 | 27,134 | 24,650 | ||||||||||||||||||||||
| Provision for loan losses | (1,703) | (3,425) | (2,385) | (2,648) | ||||||||||||||||||||||
| Net interest income after provision for loan losses | 26,798 | 27,535 | 29,519 | 27,298 | ||||||||||||||||||||||
| Noninterest income | 4,060 | 3,294 | 5,383 | 3,534 | ||||||||||||||||||||||
| Noninterest expense | 15,966 | 16,568 | 16,431 | 18,017 | ||||||||||||||||||||||
| Income before income taxes | 14,892 | 14,261 | 18,471 | 12,815 | ||||||||||||||||||||||
| Income tax expense | 2,964 | 2,865 | 3,412 | 2,577 | ||||||||||||||||||||||
| Net income | $ | 11,928 | $ | 11,396 | $ | 15,059 | $ | 10,238 | ||||||||||||||||||
| Earnings per share – basic | $ | 1.41 | $ | 1.35 | $ | 1.80 | $ | 1.24 | ||||||||||||||||||
| Earnings per share – diluted | $ | 1.41 | $ | 1.34 | $ | 1.79 | $ | 1.23 | ||||||||||||||||||
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| (dollars in thousands, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||
| Year Ended December 31, 2020 | ||||||||||||||||||||||||||
| Total interest income | $ | 25,249 | $ | 25,670 | $ | 25,842 | $ | 27,368 | ||||||||||||||||||
| Total interest expense | 3,926 | 3,253 | 2,570 | 2,169 | ||||||||||||||||||||||
| Net interest income | 21,323 | 22,417 | 23,272 | 25,199 | ||||||||||||||||||||||
| Provision for loan losses | 6,257 | 6,471 | — | — | ||||||||||||||||||||||
| Net interest income after provision for loan losses | 15,066 | 15,946 | 23,272 | 25,199 | ||||||||||||||||||||||
| Noninterest income | 3,358 | 3,103 | 3,794 | 4,050 | ||||||||||||||||||||||
| Noninterest expense | 15,416 | 15,453 | 16,116 | 15,996 | ||||||||||||||||||||||
| Income before income taxes | 3,008 | 3,596 | 10,950 | 13,253 | ||||||||||||||||||||||
| Income tax expense | 526 | 675 | 2,168 | 2,673 | ||||||||||||||||||||||
| Net income | $ | 2,482 | $ | 2,921 | $ | 8,782 | $ | 10,580 | ||||||||||||||||||
| Earnings per share – basic | $ | 0.27 | $ | 0.33 | $ | 1.01 | $ | 1.25 | ||||||||||||||||||
| Earnings per share – diluted | $ | 0.27 | $ | 0.33 | $ | 1.01 | $ | 1.24 | ||||||||||||||||||
| (dollars in thousands, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||
| Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Total interest income | $ | 25,369 | $ | 25,921 | $ | 25,474 | $ | 25,444 | ||||||||||||||||||
| Total interest expense | 3,647 | 4,046 | 4,333 | 4,186 | ||||||||||||||||||||||
| Net interest income | 21,722 | 21,875 | 21,141 | 21,258 | ||||||||||||||||||||||
| Provision for loan losses | 390 | 765 | 1,146 | 713 | ||||||||||||||||||||||
| Net interest income after provision for loan losses | 21,332 | 21,110 | 19,995 | 20,545 | ||||||||||||||||||||||
| Noninterest income | 3,165 | 2,977 | 4,774 | 3,499 | ||||||||||||||||||||||
| Noninterest expense | 15,291 | 15,952 | 16,610 | 15,752 | ||||||||||||||||||||||
| Income before income taxes | 9,206 | 8,135 | 8,159 | 8,292 | ||||||||||||||||||||||
| Income tax expense | 1,316 | 1,555 | 1,303 | 1,686 | ||||||||||||||||||||||
| Net income | $ | 7,890 | $ | 6,580 | $ | 6,856 | $ | 6,606 | ||||||||||||||||||
| Earnings per share – basic | $ | 0.86 | $ | 0.72 | $ | 0.76 | $ | 0.74 | ||||||||||||||||||
| Earnings per share – diluted | $ | 0.85 | $ | 0.72 | $ | 0.75 | $ | 0.73 | ||||||||||||||||||
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2021. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.
Management’s Report on Internal Control over Financial Reporting
The management of Home Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and the Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with the accounting principles generally accepted in the United States of America. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended.
The Company’s internal control systems are designed to ensure that transactions are properly authorized and recorded in the financial records and to safeguard assets from material loss or misuse. Such assurance cannot be absolute because of inherent limitations in any internal control system.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based on the criteria for effective internal control established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2021. Our independent registered public accountants have issued an audit report on the Company’s internal control over financial reporting. This report appears at the beginning of Item 8. Financial Statements and Supplementary Data.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the fourth fiscal quarter of 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required herein is incorporated by reference from the information contained in the sections captioned “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers” and “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management – Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement to be filed with the SEC for the 2022 Annual Meeting of Shareholders expected to be held in May 2022 (the “Proxy Statement”).
The Company has adopted a Code of Conduct and Ethics that applies to its principal executive officer and principal financial officer, as well as other officers and employees of the Company and the Bank. A copy of the Code of Ethics is available on the Company’s website at www.home24bank.com.
Item 11. Executive Compensation.
The information required herein with respect to the security ownership of certain beneficial owners and management is incorporated by reference from the information contained in the sections captioned “Management Compensation” in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information. The following table provides information as of December 31, 2021 with respect to shares of common stock that may be issued under our existing equity compensation plans, which consist of the 2009 Stock Option Plan, 2009 Recognition and Retention Plan, the 2014 Equity Incentive Plan and the 2021 Equity Incentive Plan, each of which was approved by our shareholders.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||||||||||
Equity compensation plans approved by security holders | 260,064 | (1) | $ | 30.73 | (1) | 448,317 | ||||||||||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||||||||||
| Total | 260,064 | $ | 30.73 | 448,317 | ||||||||||||||||
(1)Includes 1,120 shares subject to restricted stock grants and 45,087 restricted share units which were not vested as of December 31, 2021. The weighted-average exercise price excludes such restricted stock grants.
The information required herein is incorporated by reference from the information contained in the section captioned “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management” in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information required herein is incorporated by reference from the information contained in the sections captioned “Management Compensation – Related Party Transactions” and “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers” in the Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required herein is incorporated by reference from the information contained in the sections captioned “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
Report of Independent Registered Public Accounting Firm (Wipfli LLP, Atlanta, Georgia, PCAOB Firm ID 344)
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.
(3) Exhibits
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
| No. | Description | Location | ||||||||||||
| 3.1 | (1) | |||||||||||||
| 3.2 | (2) | |||||||||||||
| 4.1 | (1) | |||||||||||||
| 4.2 | (3) | |||||||||||||
| 10.1 | (4) | |||||||||||||
| 10.2 | (5) | |||||||||||||
| 10.3 | (5) | |||||||||||||
| 10.4 | (5) | |||||||||||||
| 10.5 | (5) | |||||||||||||
| 10.6 | (6) | |||||||||||||
| 10.7 | (7) | |||||||||||||
| 10.8 | (8) | |||||||||||||
| 10.9 | (10) | |||||||||||||
| 10.1 | (5) | |||||||||||||
| 10.11 | (5) | |||||||||||||
| 10.12 | (5) | |||||||||||||
| 10.13 | (5) | |||||||||||||
| 10.14 | (9) | |||||||||||||
| 10.15 | (9) | |||||||||||||
97
| No. | Description | Location | ||||||||||||
| 10.16 | (9) | |||||||||||||
| 10.17 | (9) | |||||||||||||
| 10.18 | (9) | |||||||||||||
| 23.1 | Filed herewith | |||||||||||||
| 31.1 | Filed herewith | |||||||||||||
| 31.2 | Filed herewith | |||||||||||||
| 32.0 | Filed herewith | |||||||||||||
| 101.INS | XBRL Instance Document | |||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document | |||||||||||||
_______________
*Denotes a management contract or compensatory plan or arrangement.
(1)Incorporated by reference from the exhibit included in Home Bancorp’s registration statement on Form S-1, filed June 6, 2008 (SEC File No. 333-151492).
(2)Incorporated by reference from the exhibit included in the Company’s Current Report on Form 8-K, dated as of March 23, 2009 and filed March 27, 2009 (SEC File No. 001-34190).
(3)Incorporated by reference from the exhibit 4.2 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 and filed March 12, 2020 (SEC File No. 001-34190).
(4)Incorporated by reference from the exhibit included in the Company’s Current Report on Form 8-K, dated as of December 22, 2008 and filed December 29, 2008 (SEC File No. 001-34190).
(5)Incorporated by reference from the exhibit included in the Company’s Current Report on Form 8-K, dated as of May 20, 2019 and filed May 24, 2019 (SEC File No. 001-34190).
(6)Incorporated by reference from Appendix A to Home Bancorp’s definitive proxy statement filed April 1, 2009 (SEC File No. 001-34190) and included in Form S-8, filed June 23, 2009 (SEC File No. 333-160155).
(7)Incorporated by reference from Appendix B to Home Bancorp’s definitive proxy statement filed April 1, 2009 (SEC File No. 001-34190).
(8)Incorporated by reference from Appendix A to Home Bancorp’s definitive proxy statement filed April 3, 2014 (SEC File No. 001-34190)
(9)Incorporated by reference from the exhibit included in the Company's Current Report on Form 8-K, dated as of May 20, 2021, and filed May 20, 2021 (SEC File No. 001-34190).
(10)Incorporated by reference from Appendix A to Home Bancorp’s definitive proxy statement filed March 26, 2021 (SEC File No. 001-34190)
(b) Exhibits
The exhibits listed under (a)(3) of this Item 15 are filed herewith.
(c) Reference is made to (a)(2) of this Item 15.
Item 16. Form 10-K Summary
Not applicable.
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| HOME BANCORP, INC. | ||||||||
| March 10, 2022 | By: | /s/ John W. Bordelon | ||||||
| John W. Bordelon Chairman of the Board, President and Chief Executive Officer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
| Name | Title | Date | ||||||||||||
| /s/ John W. Bordelon | John W. Bordelon Chairman of the Board, President and Chief Executive Officer | March 10, 2022 | ||||||||||||
| John W. Bordelon | ||||||||||||||
| /s/ J. Scott Ballard | Director | March 10, 2022 | ||||||||||||
| J. Scott Ballard | ||||||||||||||
| /s/ Paul J. Blanchet, III | Director, Chairman of Audit Committee | March 10, 2022 | ||||||||||||
| Paul J. Blanchet, III | ||||||||||||||
| /s/ Daniel G. Guidry | Director | March 10, 2022 | ||||||||||||
| Daniel G. Guidry | ||||||||||||||
| /s/ John A. Hendry | Director | March 10, 2022 | ||||||||||||
| John A. Hendry | ||||||||||||||
| /s/ Chris P. Rader | Director | March 10, 2022 | ||||||||||||
| Chris P. Rader | ||||||||||||||
| /s/ Ann F. Trappey | Director | March 10, 2022 | ||||||||||||
| Ann F. Trappey | ||||||||||||||
| /s/ Donald W. Washington | Director | March 10, 2022 | ||||||||||||
| Donald W. Washington | ||||||||||||||
| /s/ David T. Kirkley | Senior Executive Vice President and Chief Financial Officer | March 10, 2022 | ||||||||||||
| David T. Kirkley | ||||||||||||||
| /s/ Mary H. Hopkins | Home Bank Senior Vice President and Director of Financial Management | March 10, 2022 | ||||||||||||
| Mary H. Hopkins | ||||||||||||||
99