Form 8-K/A Completion of Cheaha Acquisition true 0001602658 0001602658 2021-04-01 2021-04-01
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
 
FORM 8-K/A
___________________
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of report (Date of earliest event reported):April 1, 2021
 

 
Investar Holding Corporation
(Exact name of registrant as specified in its charter)
 

 
Louisiana
001-36522
27-1560715
(State or other jurisdiction
of incorporation)
(Commission
File Number)
(I.R.S. Employer
Identification No.)
 
 
 
10500 Coursey Blvd.
Baton Rouge, Louisiana 70816
 
 
(Address of principal executive offices) (Zip Code)
 
 
Registrants telephone number, including area code: (225) 227-2222
 

 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
☐         Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
☐         Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
☐         Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
☐         Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $1.00 par value per share
ISTR
The Nasdaq Global Market
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
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. ☐
 

 
 

 
EXPLANATORY NOTE 
 
This current report on Form 8-K/A is filed as an amendment to the current report on Form 8-K of Investar Holding Corporation (“Investar”) filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2021 (the “Initial Report”) relating to Investar’s acquisition (“Acquisition”) of Cheaha Financial Group, Inc. (“Cheaha”). This current report is filed to provide, and amends the Initial Report to include, financial statements and pro forma financial information for the Acquisition that are described in parts (a) and (b) of Item 9.01 below. Except as otherwise provided in the Form 8-K/A, the Initial Report remains unchanged.
 
Item  9.01. Financial Statements and Exhibits.
 
(a)    Financial statements of businesses acquired.
 
(1)      The audited consolidated financial statements of Cheaha as of December 31, 2020 and for the fiscal year ended December 31, 2020 are filed herewith as Exhibit 99.2 hereto.
 
(2)      The unaudited consolidated financial statements of Cheaha as of and for the three month period ended March 31, 2021 are filed herewith as Exhibit 99.3 hereto.
 
(b)    Pro forma financial information.
 
The unaudited pro forma condensed financial information for Investar as of and for the three month period ended March 31, 2021 and for the year ended December 31, 2020, giving effect to the acquisition of Cheaha, is attached hereto as Exhibit 99.4 and incorporated herein by reference. The unaudited pro forma condensed financial information is presented for informational purposes only and does not purport to represent what Investar’s results of operations for financial position would have been had the transactions reflected occurred on the dates indicated or to project Investar’s financial position as of any future date or Investar’s results of operations for any future period.
 
 
(d) Exhibits
 
     
Exhibit
Number
 
Description of Exhibit
2.1   Agreement and Plan of Reorganization, dated January 21, 2021, by and among Investar Holding Corporation, Cheaha Financial Group, Inc. and High Point Acquisition, Inc. (incorporated by reference to Exhibit 2.1 to Investar Holding Corporation's Current Report on Form 8-K filed on January 25, 2021)*
23.1
  Consent of Warren Averett, LLC.
99.1   Press release dated April 1, 2021 (incorporated by reference to Exhibit 99.1 to Investar Holding Corporation's Current Report on Form 8-K files on April 1, 2021).
99.2   Audited financial statements for Cheaha Financial Group, Inc. as of and for the fiscal year ended December 31, 2020 and the accompanying notes thereto.
99.3   Unaudited consolidated financial statements of Cheaha Financial Group, Inc. as of and for the three months ended March 31, 2021.
99.4   Unaudited pro forma condensed financial information as of and for the three months ended March 31, 2021 and for the year ended December 31, 2020, and the accompanying notes thereto.
104   The cover page of Investar Holding Corporation’s Form 8-K is formatted in Inline XBRL.
 
 
*The registrant has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a copy of any omitted schedule or similar attachment to the Commission upon request.
 
 

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
       
   
INVESTAR HOLDING CORPORATION
       
June 10, 2021
 
By:
/s/ John J. D’Angelo
     
John J. D’Angelo
     
President and Chief Executive Officer
 
 
 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in this Form 8-K/A of our report dated April 14, 2021 for Cheaha Financial Group, Inc. as of and for the years ended December 31, 2020 and 2019 relating to the consolidated financial statements.

 

/s/ Warren Averett, LLC

 

Birmingham, Alabama

June 10, 2021

 

 

Exhibit 99.2

 

 

 

 

 

 

 

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

 

CONSOLIDATED FINANCIAL STATEMENTS 

 

DECEMBER 31, 2020 AND 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

TABLE OF CONTENTS

DECEMBER 31, 2020 AND 2019

 


 

INDEPENDENT AUDITORS REPORT

1

   

CONSOLIDATED FINANCIAL STATEMENTS

 
   

Consolidated Statements of Financial Condition

2

   

Consolidated Statements of Income

4

   

Consolidated Statements of Comprehensive Income

6

   

Consolidated Statements of Changes in Stockholders' Equity

7

   

Consolidated Statements of Cash Flows

9

   

Notes to the Consolidated Financial Statements

11

 

 

 

 

B01.JPG

2500 Acton Road

Birmingham, AL 35243

205.979.4100

warrenaverett.com

 

 

 

INDEPENDENT AUDITORS' REPORT

 

 

To the Board of Directors and Stockholders Cheaha Financial Group, Inc.

 

We have audited the accompanying consolidated statements of financial condition of Cheaha Financial Group, Inc. and Subsidiary as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

 

Managements Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cheaha Financial Group, Inc. and Subsidiary as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

B02.JPG

 

Birmingham, Alabama

April 14, 2021

 

1

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31, 2020 AND 2019

 


 

ASSETS

 

    2020     2019  
                 
CASH AND CASH EQUIVALENTS                
Cash and due from banks   $ 3,711,592     $ 2,628,819  
Interest-bearing deposits with other banks     11,629,227       8,626,288  
                 
Total cash and cash equivalents     15,340,819       11,255,107  
                 
SECURITIES                
Securities available-for-sale     84,786,069       69,266,665  
Securities held-to-maturity, fair values of $15,047 and $696,533 for 2020 and 2019, respectively     15,000       693,920  
Restrictive equity investments     281,500       274,900  
                 
Total securities     85,082,569       70,235,485  
                 

LOANS, NET OF ALLOWANCE FOR LOAN LOSSES

    126,495,471       119,606,290  

MORTGAGE LOANS HELD-FOR-SALE

    184,549        

PREMISES AND EQUIPMENT, NET

    3,914,738       4,046,285  

FORECLOSED REAL ESTATE

     —        

ACCRUED INTEREST RECEIVABLE

    988,043       882,002  

PREPAID EXPENSES

    61,403       34,794  

DEFERRED INCOME TAX ASSET

          370,282  

BANK-OWNED LIFE INSURANCE

    3,002,548       2,920,062  

OTHER ASSETS

    97,735       5,938  
                 

TOTAL ASSETS

  $ 235,167,875     $ 209,356,245  

 

See notes to the consolidated financial statements

 

2

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31, 2020 AND 2019

 


 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

   

2020

   

2019

 
DEPOSITS                

Checking

  $ 93,513,890     $ 76,992,193  

Savings

    13,766,563       10,323,927  

Time deposits

    94,409,866       91,486,977  
                 

Total deposits

    201,690,319       178,803,097  
                 

BORROWINGS

    3,093,000       3,093,000  

DEFERRED COMPENSATION AGREEMENTS

    1,025,912       1,055,405  

ACCRUED CHANGE IN CONTROL COMPENSATION

    400,000        

ACCRUED INTEREST PAYABLE

    385,437       550,517  

ADVANCE PAYMENTS FROM BORROWERS FOR TAXES AND INSURANCE

    75,904       77,208  

DEFERRED INCOME TAX LIABILITY

    4,650        

OTHER LIABILITIES

    213,612       191,893  
                 

Total liabilities

    206,888,834       183,771,120  
                 
STOCKHOLDERS' EQUITY                

Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued

           

Common stock, $0.01 par value; 5,000,000 shares authorized; 542,500 shares issued and 513,332 and 513,964 shares outstanding as of December 31, 2020 and 2019, respectively

    5,425       5,425  

Additional paid-in capital

    5,358,478       5,358,478  

Accumulated other comprehensive income

    1,972,758       685,978  

Retained earnings

    21,757,011       20,319,539  

Treasury stock – 29,168 shares and 28,536 shares, at cost, as of December 31, 2020 and 2019, respectively

    (814,631 )     (784,295 )
                 
Total stockholders' equity     28,279,041       25,585,125  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 235,167,875     $ 209,356,245  

 

See notes to the consolidated financial statements

 

3

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

DECEMBER 31, 2020 AND 2019

 


 

   

2020

   

2019

 
INTEREST INCOME                

Interest and fees on loans

  $ 8,390,803     $ 8,028,894  
Interest on investment securities:                

U.S. Government and agency securities

    361,023       557,052  

Obligations of states and political subdivisions

    1,324,426       1,285,978  

Other securities

    11,533       15,490  

Interest on interest bearing deposits

    41,449       92,867  
                 

Total interest income

    10,129,234       9,980,281  
                 
INTEREST EXPENSE                

Interest on deposits

    1,685,034       1,857,361  

Interest on borrowings

    95,894       131,306  
                 

Total interest expense

    1,780,928       1,988,667  
                 

NET INTEREST INCOME

    8,348,306       7,991,614  
                 

PROVISION FOR LOAN LOSSES

           
                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    8,348,306       7,991,614  

 

See notes to the consolidated financial statements

 

4

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

DECEMBER 31, 2020 AND 2019

 


 

   

2020

   

2019

 
NONINTEREST INCOME                

Service charges, fees, and commissions

  $ 627,434     $ 687,764  

Mortgage origination fees

    221,543       175,980  

Net investment security gains

    201,444       108,389  

Miscellaneous income

    111,182       133,211  
                 

Total noninterest income

    1,161,603       1,105,344  
                 
NONINTEREST EXPENSES                

Salaries and employee benefits

    3,400,790       3,096,668  

Occupancy and equipment expense

    916,887       901,495  

Professional fees

    525,956       381,479  

Data processing expense

    394,797       314,976  

Telephone

    202,468       190,328  

Director and committee fees

    93,600       103,200  

FDIC and state assessments

    76,818       35,344  

Advertising and public relations

    66,424       80,144  

Loss on other real estate

    200       25,984  

Other expenses

    510,255       619,917  
                 

Total noninterest expenses

    6,188,195       5,749,535  
                 

INCOME BEFORE INCOME TAXES

    3,321,714       3,347,423  
                 

INCOME TAX PROVISION

    599,332       629,269  
                 

NET INCOME

  $ 2,722,382     $ 2,718,154  
                 
EARNINGS PER COMMON SHARE                

Basic

  $ 5.30     $ 5.29  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING                
Basic     513,756       513,964  

 

See notes to the consolidated financial statements

 

5

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 


 

   

2020

   

2019

 

NET INCOME

  $ 2,722,382     $ 2,718,154  
                 

OTHER COMPREHENSIVE INCOME

               

Unrealized gains (losses) on available-for-sale securities:

 

Unrealized holding gains arising during the period

    1,964,156       3,373,672  

Reclassification adjustments for gains included in net income

    (201,444 )     (108,388 )
                 

Net unrealized gains

    1,762,712       3,265,284  

Income tax related to items of other comprehensive income

    (475,932 )     (881,627 )
                 
Other comprehensive income     1,286,780       2,383,657  
                 
COMPREHENSIVE INCOME   $ 4,009,162     $ 5,101,811  

 

See notes to the consolidated financial statements

 

6

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 


 

                            Accumulated                          
                    Additional     Other                          
    Common Stock     Paid-in     Comprehensive     Retained     Treasury          
    Shares     Par Value     Capital     Income (Loss)     Earnings     Stock     Total  
                                                         
BALANCE AT DECEMBER 31, 2018     542,500     $ 5,425     $ 5,358,478     $ (1,697,679 )   $ 21,456,115     $ (784,295 )   $ 24,338,044  
                                                         
Net income                             2,718,154             2,718,154  
                                                         
Dividends declared and paid                             (3,854,730 )           (3,854,730 )
                                                         
Other comprehensive income                       2,383,657                   2,383,657  
                                                         
BALANCE AT DECEMBER 31, 2019     542,500     $ 5,425     $ 5,358,478     $ 685,978     $ 20,319,539     $ (784,295 )   $ 25,585,125  

 

See notes to the consolidated financial statements

 

7

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 


 

                            Accumulated                          
                    Additional     Other                          
    Common Stock       Paid-in     Comprehensive     Retained     Treasury          
    Shares     Par Value     Capital     Income (Loss)     Earnings     Stock     Total  
                                                         
BALANCE AT DECEMBER 31, 2019     542,500     $ 5,425     $ 5,358,478     $ 685,978     $ 20,319,539     $ (784,295 )   $ 25,585,125  
                                                         
Treasury stock                                   (30,336 )     (30,336 )
                                                         
Net income                             2,722,382             2,722,382  
                                                         
Dividends declared and paid                             (1,284,910 )           (1,284,910 )
                                                         
Other comprehensive income                       1,286,780        —             1,286,780  
                                                         
BALANCE AT DECEMBER 31, 2020     542,500     $ 5,425     $ 5,358,478     $ 1,972,758     $ 21,757,011     $ (814,631 )   $ 28,279,041  

 

See notes to the consolidated financial statements

 

8

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 


 

   

2020

   

2019

 
CASH FLOWS FROM OPERATING ACTIVITIES                

Net income

  $ 2,722,382     $ 2,718,154  
                 

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for depreciation

    165,097       167,351  

Gains on disposition of foreclosed real estate

          19,514  

Writedowns of foreclosed real estate

    34,905        

Amortization and accretion of securities, net

    500,249       519,975  

Realized gain on sale of securities available-for-sale

    (201,444 )     (108,388 )

Deferred income tax benefit

    (101,000 )     25,000  

Change in mortgage loans held-for-sale

    (184,549 )     115,029  

Change in accrued interest receivable

    (106,041 )     54,032  

Change in prepaid expenses

    (26,609 )     24,722  

Change in supplemental executive retirement plan

    (29,493 )     51,006  

Change in accrued change in control compensation

    400,000        

Change in accrued interest payable

    (165,080 )     210,701  

Change in other

    (70,078 )     295,351  
                 

Net cash provided by operating activities

    2,938,339       4,092,447  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Proceeds from calls or maturities of held-to-maturity securities

    680,000       370,000  
Activity in available-for-sale securities:                

Purchases

    (35,371,583 )     (18,633,212 )

Sales

    14,323,187       18,207,024  

Maturities, paydowns, and calls

    6,991,819       6,558,380  

Purchases of restrictive equity investments

    (6,600 )     (800 )

Net change in loans receivable

    (6,936,509 )     (8,120,429 )

Proceeds from disposition of foreclosed real estate

    12,423       71,579  

Purchases of premises and equipment

    (33,550 )     (213,609 )

Change in bank-owned life insurance

    (82,486 )     (83,266 )
                 
Net cash used in investing activities     (20,423,299 )     (1,844,333 )

 

See notes to the consolidated financial statements

 

9

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 


 

   

2020

   

2019

 
CASH FLOWS FROM FINANCING ACTIVITIES                

Net increase in deposit accounts

  $ 22,887,222     $ 5,478,888  

Net change in advance payments from borrowers for taxes and insurance

    (1,304 )     27,409  

Cash dividends paid

    (1,284,910 )     (3,854,730 )

Purchase of treasury stock

    (30,336 )      
                 

Net cash provided by financing activities

    21,570,672       1,651,567  
                 

INCREASE IN CASH AND CASH EQUIVALENTS

    4,085,712       3,899,681  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

    11,255,107       7,355,426  
                 

CASH AND CASH EQUIVALENTS AT END OF YEAR

  $ 15,340,819     $ 11,255,107  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

               
Cash paid during the year for interest   $ 1,777,966     $ 1,250,750  
                 
Cash paid during the year for income taxes, net   $ 810,957     $ 321,064  
                 
NONCASH ACTIVITIES                
Loans transferred to other real estate owned   $ 47,328     $ 67,500  
                 
Proceeds from sales of foreclosed real estate financed through loans   $     $ 113,599  
                 
Total increase in unrealized gains on securities available-for-sale   $ 1,762,712     $ 3,265,283  

 

See notes to the consolidated financial statements

 

10

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

1.

ORGANIZATION

 

Cheaha Financial Group, Inc. (the Company) and its wholly-owned subsidiary, Cheaha Bank (the Bank), operate predominantly in the domestic commercial banking industry in east Alabama. The Company's main office is in Oxford, Alabama in Calhoun County with additional branches in Alexandria, Anniston, and Jacksonville, Alabama.

 

The accounting and reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America (U.S. GAAP) and to general practice within the banking industry. The following summarizes the most significant of these policies.

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany balances and transactions have been eliminated. Variable interest entities (VIEs) are consolidated if the Company is exposed to the majority of the VIEs’ expected losses and/or residual returns (i.e., the Company is considered to be the primary beneficiary). No VIEs were consolidated at December 31, 2020 and 2019. Unconsolidated investments in VIEs in which the Company has significant influence over operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%) are accounted for using the equity method. Unconsolidated investments in VIEs in which the Company has a voting or economic interest of less than 20% are generally carried at cost. Investment in subsidiary is carried at the parent company's equity in the underlying net assets. Unless otherwise indicated herein, the financial results of the Company refer to the Company and the Bank on a consolidated basis.

 

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated 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 are related to the determination of the allowance for loan losses, the valuation of deferred tax assets, other-than-temporary impairments of securities, and the fair value of financial instruments.

 

The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.

 

11

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local  economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

 

Significant Group Concentrations of Credit Risk

The majority of the Company's activities are with customers in east Alabama. Note 4 discusses the types of securities in which the Company invests. Note 5 discusses the types of lending done by  the Company. The Company does not have any concentrations in any one industry or customer. See Note 13 for a discussion of geographic concentration and the risk therein.

 

Securities

Securities are classified as either held-to-maturity, available-for-sale, or trading.

 

Securities held-to-maturity represent securities for which management has the ability and intent to hold on a long-term basis or until maturity. These securities are carried at amortized cost and adjusted for amortization of premiums and accretion of discount, to the earlier of the maturity or call date.

 

Securities available-for-sale represent those securities intended to be held for an indefinite period of time, including securities that management intends to use as part of its asset/liability strategy or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital, or other similar factors. Securities available-for-sale are recorded at market value with unrealized gains and losses net of any tax effect and are reported as other comprehensive income (loss) in a separate component of stockholders’ equity until realized. Gains or losses on disposition are based on the net proceeds and the adjusted carrying amount on the securities sold, using the specific identification method. The estimated values are provided by security dealers who have obtained quoted prices.

 

Securities carried in trading accounts are carried at market value with unrealized gains and losses reflected in income. The Company had no trading securities at December 31, 2020 and 2019.

 

Realized and unrealized gains and losses are based on the specific identification method.  Purchase premiums and discounts are recognized in interest income using a method which approximates the interest method over the terms of the securities. Declines in fair values of individual held-to-maturity and available-for-sale securities below their costs that are other-than- temporary result in writedowns of the individual securities to their fair values. The related writedowns are included in earnings as realized losses.

 

12

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Restrictive Investment Securities

The Company has invested in selected equity instruments issued in the form of restricted stocks and common stock of a special purpose trust formed to issue trust preferred securities. The restricted stocks and trust stock are categorized as other investment securities and are accounted for under the cost method. These investments represent less than a 20% economic interest and have no readily ascertainable market value.

 

Loans

Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any unearned income, charge-offs, and unamortized fees and costs. Loan origination and commitment fees, as well as certain origination costs, when material, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method or the straight-line method.

 

Troubled Debt Restructurings (TDRs)

Modifications to a borrower’s debt agreement are considered troubled debt restructurings (TDRs) if a concession is granted for economic or legal reasons related to a borrower’s financial difficulties that otherwise would not be considered. TDRs are undertaken in order to improve the likelihood of recovery on the loan and may take the form of modifications made with the stated interest rate lower than the current market rate for new debt with similar risk, other modifications to the structure of the loan that fall outside of normal underwriting policies and procedures, or, in certain limited circumstances, forgiveness of principal or interest. TDRs can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower.

 

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable and reasonably estimable credit losses inherent in loans as of December 31, 2020 and 2019. The estimate of the allowance is based on a variety of factors, including an evaluation of the loan portfolio, past loss experience, adverse situations that have occurred, but are not yet known, that may affect the borrower’s ability to repay, the estimated value of underlying collateral, and current economic conditions.

 

For purposes of determining the allowance for loan losses, the Company has segmented loans into the following segments: commercial, financial, and agricultural; real estate – construction, land development, and other land; real estate – mortgage; and consumer. Significant judgment is used to determine the estimation method that fits the credit risk characteristics of each portfolio segment. The Company uses internally developed models in this process. Management must use judgment in establishing input metrics for the modeling processes. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as information becomes available and as economic conditions change.

 

13

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Loans considered to be uncollectible are charged-off against the allowance. The amount and  timing of charge-offs on loans includes consideration of the loan type, length of delinquency, insufficiency of collateral value, lien priority, and the overall financial condition of the borrower. Recoveries on loans previously charged-off are credited back to the allowance. Loans that have been charged-off against the allowance are periodically monitored to evaluate whether further adjustments to the allowance are necessary.

 

The allowance for loan losses consists of three components: general, specific, and unallocated.

 

 

The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors, which includes trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other influencing factors.

 

The specific component is determined for impaired loans, including TDRs, individually based on management’s evaluation of the borrower’s overall financial condition, resources, and payment record; the prospects for support from any financially responsible guarantors; and the realizable value of any collateral. Reserves are established for these loans based upon an estimate of probable losses for the individual loans deemed to be impaired. This estimate considers all available evidence using one of the methods provided by applicable authoritative guidance. Loans determined to be collateral-dependent are measured at the fair value of collateral less disposal costs. Loans for which impaired reserves are provided are excluded from the general component reserve calculations described above to prevent duplicate reserves.

 

The unallocated component is not allocated to any specific category of loans. This unallocated portion of the allowance reflects management’s best estimate of the elements of imprecision and estimation of risk inherent in the calculation of the overall allowance. Due  to the subjectivity involved in determining the overall allowance, including the unallocated portion, the portion considered unallocated may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current economic conditions, industry or borrower concentrations, and the status of merged institutions.

 

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. If management determines that the value of  the impaired loan is less than the recorded investment in the loan, impairment is recognized through a charge-off to the allowance. Interest income is recognized as earned unless the loan is placed on nonaccrual status.

 

14

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. Generally, impaired loans include loans on nonaccrual status, loans that  have been assigned a specific allowance for credit losses, loans that have been partially charged off, and loans designated as troubled debt restructurings.

 

Based on facts and circumstances available, management believes that the allowance for loan losses is adequate to cover any probable losses in the Company’s loan portfolio. However, future adjustments to the allowance may be necessary, and the Company’s results of operations could be adversely affected if circumstances differ substantially from the assumptions used by management in determining the allowance for loan and lease losses. Management believes that it has established the allowance in accordance with GAAP and has taken into account the views of its regulators and the current economic environment; there can be no assurance that in the future the Bank's regulators or its economic environment will not require further increases in the allowance.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures unless such loans are the subject of a restructuring agreement.

 

Asset Quality

Written underwriting standards established by management govern the lending activities of the Company. An established loan policy requires appropriate documentation, including borrower financial data and credit reports. For loans secured by real property, the Company generally requires property appraisals, title insurance or a title opinion, hazard insurance, and flood insurance, where appropriate. Loan payment performance is monitored, and late charges are assessed on past-due accounts. Legal proceedings are instituted, as necessary, to minimize loss. Commercial and residential loans of the Company are periodically reviewed through a loan review process. All other loans are also subject to loan review through a periodic sampling process.

 

The Company uses an asset risk classification system consistent with guidelines established by the Uniform Financial Institution Ratings System (UFIRS) as part of its efforts to monitor asset quality. In connection with examinations of insured institutions, both federal and state examiners also have the authority to identify problem assets and, if appropriate, classify them.

 

15

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

The Company has nine credit quality indicators for loans:

 

Grade 1: Prime – Prime grade loans are the best credits.  They consist of loans with very little  credit risk by borrowers with an excellent credit reputation and a major borrower who compares favorably in the upper quadrant of ratios presented. They are loans with an individual borrower with a substantial net worth and sufficient income and/or alternative fund sources to retire the debt as agreed.

 

Grade 2: Desirable – Desirable grade loans are loans with little credit risk and an acceptable credit reputation. They consist of loans to a borrower who compares favorably in the middle quadrant of ratio presentations. They are loans with an individual borrower with an acceptable net worth and sufficient income and/or alternative fund sources to retire the debt as agreed. The collateral is acceptable, having reasonable marketability.

 

Grade 3: Acceptable – Acceptable grade loans are loans that meet at least five out of the ten following general characteristics: debt is unsecured, and debt/income ratio exceeds  40% but is  less than 55%; the borrower does not have a loan listing with the bank; the source of repayment is clear, but the income stream is low compared to debt load; length of employment is less than one year with present employer; the borrower invests an insignificant down payment toward the purchase item, usually less than 15%; loan is secured by collateral that has a low possibility of resale; the borrower has a debt to net worth ratio between 1.50/2.25 to 1; the borrower’s credit report shows delinquencies, collections, judgments, or no established credit record; the borrower lives outside of the bank’s assessment area or state; the borrower is refinancing an existing debt for the first time and is not reducing principal, but is paying all accumulated interest and late charges.

 

Grade 4: Specific Identification/Special Mention – Specific identification/special mention grade  loans are loans that have been identified by management as having a strong potential for at least a partial loss. There may be marketable collateral, but of insufficient value to retire the entire debt. Management has recognized the potential for loss and has made the decision to increase loan loss reserve by a percentage of the balance of these loans. The amount will be assigned depending upon circumstances defined by the lending officer.

 

Grade 5: Marginal/Substandard – Marginal/substandard grade loans are loans with credit risk. There is inadequate supporting financial and credit information and/or the borrower has a marginal credit reputation. The borrower compares in the lower quadrant of ratio presentations. This is an individual borrower who has a minimal net worth and income and/or minimal alternative fund sources to repay the debt as agreed. The collateral is acceptable with a reasonable market, but  with minimum margin.

 

Grade 6: Doubtful – Doubtful grade loans are loans where the elements of probable loss exist. The borrower is in poor financial condition, and repayment could only be affected by partial or full sale of vital assets. There is insufficient collateral due to value or marketability.

 

16

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Grade 7: Loss – Loss grade loans are loans that exhibit the following general characteristics, typically during the life of the loan: the credit substantially exceeds the collateral value; there is no source of repayment; repayment is dependent upon some other person who was not a co-maker on the loan; repayment is based upon a speculative profit or source such as liquidation of assets or high risk ventures; if the bank determines the collateral is illegal, restricted, or no longer in existence; the purpose of the loan was illegal and the borrower has been charged by law enforcement agencies; the debt to net worth ratio has risen significantly and will continue to be significantly more than 3 to 1 in the next three to five years; the bank has foreclosed or repossessed the collateral, and there appears to be little or no value to the collateral; or the borrower has filed bankruptcy and there appears to be little or no assets that could be sold to reduce the debt.

 

Grades 1 through 3 are combined in the notes to the financial statements and classified as pass.

 

Income Recognition on Impaired and Nonaccrual Loans

Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-collateralized and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual.

 

Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of principal and interest.

 

While a loan is classified as nonaccrual, and the future collectability of the recorded loan balance is doubtful, collections of principal and interest are generally applied as reductions to principal outstanding, except in the cases of loans with scheduled amortizations, where the payment is generally applied to the oldest payment due. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. Interest income recognized on a cash basis was immaterial for the years ended December 31, 2020 and 2019.

 

Mortgage Loans Held-for-Sale

Mortgage loans held-for-sale are carried at the lower of aggregate cost or market. The cost of mortgage loans held-for-sale is the mortgage amount plus certain net origination costs less discounts collected. Gains and losses resulting from changes in the market value of the inventory are netted. Any net gain that results is deferred and recognized when the loan is sold; any net loss that results is recognized when incurred. The aggregate cost of mortgage loans held-for-sale at December 31, 2020 and 2019, approximates their aggregate net realizable value. Gains or losses on the sale of mortgage loans held-for-sale are included in other noninterest income in the consolidated statements of income.

 

17

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Premises and Equipment

Land is carried at cost. Other premises and equipment are stated at cost less accumulated depreciation. Expenditures for additions and major improvements that significantly extend the  useful lives of the assets are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. The carrying values of assets traded in are used to adjust the carrying values of the new assets acquired by trade. Assets which are disposed of are removed from the accounts, and the resulting gains or losses are recorded in operations.

 

Depreciation is provided generally by the straight-line method based on the estimated useful lives of the respective assets, which generally range from three to forty years.

 

Foreclosed Real Estate

Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property. In-substance foreclosed properties are those properties for which the Bank has taken physical possession, regardless of whether formal foreclosure proceedings have taken place.

 

At the time of foreclosure, foreclosed real estate is recorded at fair value less cost to sell, which becomes the property's new basis. Any writedowns based on the asset's fair value at date of acquisition are charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management, and an asset is carried at the lower of its new cost basis or fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and subsequent adjustments to the carrying amount of the property are included in income (loss) on foreclosed real estate. Costs incurred to complete, repair, renovate, or make the property whole are capitalized.

 

Bank-Owned Life Insurance

The Company has purchased life insurance policies on certain key employees. These policies are recorded at their cash surrender value or the amount that can be realized. Income from these policies and changes in the cash surrender value are recorded in other noninterest income in the consolidated statements of income.

 

Deposits

Customer deposits include public funds held on deposit under the Security for Alabama Funds Enhancement (SAFE) Program. The SAFE Program was established by the Alabama legislature to provide protection for public funds enrolled in the SAFE Program. Under this program, financial institutions are required to collateralize public fund deposits (Note 4).

 

Borrowings

The Company records Federal Home Loan Bank advances and federal funds purchased at their principal amounts. Interest expense is recognized based on the coupon rate of the obligations.

 

Preferred Stock

Preferred stock represents shares which do not participate in the profits of the Company, are redeemable at par, and whose stockholders have no voting rights.

 

18

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Common Stock

Common stock represents shares which participate in the profits of the Company and whose stockholders have voting rights that are equal to one vote per share.

 

Treasury Stock

Common stock shares repurchased are recorded as treasury stock at cost.

 

Stock-Based Compensation

The Company recognizes compensation cost relating to share-based payment transactions (stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share plans) in the consolidated financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued.

 

The Company calculates and recognizes compensation cost for all stock awards over the employees’ service period, generally defined as the vesting period. For awards with graded- vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company uses a Black-Scholes model to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.

 

Stock compensation accounting guidance (Accounting Standards Codification (ASC) Topic 718, Compensation-Stock Compensation) requires that the compensation cost related to share-based payment transactions be recognized in financial statements. All stock-based compensation plans result in equity classification.

 

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated based on the grant date fair value and recognized over an employee’s service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black- Scholes model is used to estimate the fair value of stock options, while a market price of the Company’s common stock at the date of grant is used for restricted stock awards.

 

Earnings per Common Share

Basic earnings per common share are computed by dividing earnings available to stockholders by the weighted average number of common shares outstanding during the period.

 

Comprehensive Income (Loss)

Comprehensive income (loss) is generally defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income (loss) is composed of those items not recorded as components of net income. The accumulated balance of other comprehensive income (loss), if applicable, is to be reported separately from retained earnings in the equity section of the consolidated statements of financial condition.

 

19

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

In the calculation of comprehensive income (loss), certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income (loss) in that period or earlier periods.

 

Employee Benefit Plans

The Company has a qualified 401(k) profit-sharing plan covering substantially all of its employees. Eligible participating employees may elect to contribute tax-deferred contributions. Company contributions include matching and discretionary annual amounts as determined by the Board of Directors.

 

The Bank has also provided salary continuation plans for certain key employees and directors. These plans are generally funded through life insurance contracts owned by the Bank.

 

Company contributions to these benefit plans are included in salaries and benefits (Note 11).

 

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over assets has been surrendered. Control over transferred assets is deemed surrendered when (1) the assets have been isolated from the Company and put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain the transferee from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturities or the ability to unilaterally cause the holder to return specific assets.

 

Advertising Costs

The Company's policy is to expense advertising costs as incurred.

 

Income Taxes

Income taxes are provided for the tax effects of the transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of available-for-sale securities, allowance for loan losses, estimated losses on foreclosed real estate, deferred compensation, and accumulated depreciation for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

 

The Company and its subsidiary file a consolidated federal income tax return. The subsidiary provides for income taxes on a separate return basis and remits to the Company amounts determined to be currently payable.

 

20

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when funded. See Note 12 for a further discussion of these financial instruments.

 

The Bank has available as a source of short-term financing the purchase of federal funds from other commercial banks from available lines totaling $9,500,000, all of which was available and unused at December 31, 2020.

 

The Bank has available as a source of financing a line of credit of approximately $58,747,000 with the Federal Home Loan Bank (FHLB), of which all was available and unused at December 31, 2020. The ability to utilize the remaining line is dependent on the amount of eligible collateral that is free to pledge to the FHLB. In addition, as part of the borrowing agreement, the Bank is required to purchase FHLB stock (Note 4).

 

Fair Value Measurements

The Bank adopted authoritative guidance issued by the Financial Accounting Standards Board (FASB) on fair value measurements. This standard defines fair value for financial reporting purposes as the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction between market participants at the measurement date (reporting date). Fair value is based on an exit price in the principal market or most advantageous market in which the reporting entity could execute a transaction. New fair value measurements are not required, but fair value disclosures are required for financial assets or liabilities where other accounting pronouncements require or permit fair value reporting.

 

For each asset and liability required to be reported at fair value, management has identified the unit of account and valuation premise to be applied for purposes of measuring fair value. The unit of account is the level at which an asset or liability is aggregated or disaggregated. The valuation premise is a concept that determines whether an asset is measured on a stand-alone basis or in combination with other assets. The Bank measures its assets and liabilities on a stand-alone basis, then aggregates assets and liabilities with similar characteristics for disclosure purposes.

 

The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Bank. Unobservable inputs are inputs that reflect the Bank’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

21

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

 

The hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Bank has the ability to access. Since valuations are based on quoted prices that are readily  and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

Level 2 – Valuations based on observable inputs, including quoted prices (other than Level 1) in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, such as interest rates, yield curves, volatilities, and default rates, and inputs that are derived principally from or corroborated by observable market data.

 

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

The adoption of this authoritative guidance had no impact on the consolidated financial statements of the Company other than the additional disclosures included in Note 17.

 

Segment Information

All of the Company's offices offer similar products and services, are located in the same geographic region, and serve the same customer segments of the market. As a result, management considers all units as one operating segment and, therefore, feels that the basic consolidated financial statements and related notes provide details related to segment reporting.

 

Subsequent Events

Management has evaluated subsequent events and their potential effects on these consolidated financial statements through the date of the independent auditors’ report, which is the date the consolidated financial statements were available to be issued.

 

Reclassifications

Certain reclassifications have been made to the 2019 financial statements included herein to conform to the 2020 presentation. These reclassifications had no effect on the financial position, results of operations, or cash flows of the Company as previously reported.

 

22

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

 

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, in November 2018 issued ASU 2018-19, in April 2019 issued ASU 2019-04, in May 2019 issued ASU 2019-05, and in November 2019 issued ASU 2019-10 and 2019-11, Financial InstrumentsCredit Losses (Topic 326). The amendments in  these ASUs cover two areas: assets measured at amortized cost and available-for-sale debt securities. For assets measured at amortized cost, the amendments in these ASUs require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. For available-for-sale debt securities, credit  losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through  collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022. All entities may adopt the amendments in this ASU as early as the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is reviewing the impact that the adoption of this ASU may have on its financial statements.

 

 

3.

RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

 

The Bank is required by regulatory authorities to maintain average reserve balances either in vault cash or on deposit with the Federal Reserve Bank. The reserve requirement was $0 and $1,174,000, at December 31, 2020 and 2019, respectively.

 

The Company maintains cash and cash equivalents in various correspondent or other bank accounts. The amounts by which cash and cash equivalents exceeded Federal Deposit Insurance Corporation (FDIC) insurance coverage at December 31, 2020 and 2019, were $11,629,227 and $8,626,288, respectively. Management monitors these bank accounts and does not expect to incur any losses from such accounts. In addition, federal funds sold are not insured or guaranteed by other parties.

 

23

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

4.

SECURITIES

 

The amortized cost and fair value of securities available-for-sale, with gross unrealized gains and losses, as of December 31, 2020 and 2019, were as follows:

 

    Securities Available-for-Sale  
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
                                 
As of December 31, 2020                                
Debt securities:                                
State and municipal   $ 62,623,883     $ 2,290,886     $ 33,429     $ 64,881,340  
Mortgage-backed securities:                                

U.S. Government-sponsored enterprises (GSE)* residential

    19,459,414       456,518       11,567       19,904,365  
                                 

Total debt securities

    82,083,297       2,747,404       44,996       84,785,705  
                                 

Marketable equity securities

    364                   364  
                                 

Total securities available-for-sale

  $ 82,083,661     $ 2,747,404     $ 44,996     $ 84,786,069  
                                 
As of December 31, 2019                                
Debt securities:                                

State and municipal

  $ 42,731,423     $ 1,104,556     $ 29,661     $ 43,806,318  
Mortgage-backed securities:                                

U.S. Government-sponsored enterprises (GSE)* residential

    25,595,182       98,653       233,852       25,459,983  
                                 

Total debt securities

    68,326,605       1,203,209       263,513       69,266,301  
                                 

Marketable equity securities

    364                   364  
                                 

Total securities available-for-sale

  $ 68,326,969     $ 1,203,209     $ 263,513     $ 69,266,665  

 

* GSE – Government-sponsored enterprise, such as Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Government National Mortgage Association (GNMA).

 

24

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

4.

SECURITIES CONTINUED

 

    Securities Held-to-Maturity  
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
                                 
As of December 31, 2020                                
Debt securities:                                
State and municipal   $ 15,000     $ 47     $     $ 15,047  
                                 
As of December 31, 2019                                
Debt securities:                                
State and municipal   $ 693,920     $ 2,613     $     $ 696,533  

 

Investment securities with a carrying amount of $26,048,610 and $25,353,604 were pledged to secure various public funds under the SAFE Program and Federal Home Loan Advances at December 31, 2020 and 2019, respectively.

 

The contractual maturities of securities held-to-maturity and securities available-for-sale at December 31, 2020, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

    Available-for-Sale     Held-to-Maturity  
   

Amortized

Cost

    Fair Value    

Amortized

Cost

    Fair Value  
                                 

Within one year

  $     $     $     $  
Over one year through five years                 15,000       15,047  

Over five years through 10 years

    6,501,348       6,753,569              

Over 10 years

    75,581,949       78,032,136              
                                 
    $ 82,083,297     $ 84,785,705     $ 15,000     $ 15,047  

 

Mortgage-backed securities have been included in the maturity tables based upon the guaranteed pay-off date of each security.

 

25

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

4.

SECURITIES CONTINUED

 

For the years ended December 31, 2020 and 2019, proceeds from sales, calls, and maturities of securities available-for-sale amounted to $15,593,187 and $20,402,025, respectively; gross realized gains were $232,177 and $113,345, respectively; and gross realized losses were $31,491 and $4,956, respectively.

 

For the years ended December 31, 2020 and 2019, proceeds from calls and maturities of securities held-to-maturity amounted to $680,000 and $370,000, respectively, with gross realized gains of $758 and $0, respectively, and no gross realized losses.

 

The following table shows the Company's investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2020 and 2019.

 

    Available-for-Sale  
    Less Than 12 Months     12 Months or More     Total  
   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

 

As of December 31, 2020

                                         

Debt securities:

                                               

State and municipal

  $ 4,728,116     $ 33,429     $     $     $ 4,728,116     $ 33,429  

Mortgage-backed securities:

                                               
GSE residential     9,154,748       11,567                   9,154,748       11,567  
                                                 
    $ 13,882,864     $ 44,996     $     $     $ 13,882,864     $ 44,996  
                                                 
As of December 31, 2019                                                
Debt securities:                                                

State and municipal

  $ 3,211,961     $ 20,889     $ 992,288     $ 8,772     $ 4,204,249     $ 29,661  

Mortgage-backed securities:

                                               

GSE residential

    10,669,700       208,621       4,713,780       25,231       15,383,480       233,852  
                                                 
    $ 13,881,661     $ 229,510     $ 5,706,068     $ 34,003     $ 19,587,729     $ 263,513  

 

As of December 31, 2020 and 2019, there were no held-to-maturity securities in an unrealized loss position.

 

26

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

4.

SECURITIES CONTINUED

 

State and Municipal Securities

At December 31, 2020, the Company had 10 state and municipal securities with unrealized losses. The unrealized losses on these securities were caused by increases in interest rates and reflected aggregate depreciation from amortized cost of 0.70%. The contractual cash flows of these investments are guaranteed by various state and local government agencies. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment.

 

The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2020, because the decline in market value is attributable to increases in interest rates and not credit quality, the Company does not intend to sell the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

 

Mortgage-Backed Securities: GSE Residential

The Company had five mortgage-backed securities with unrealized losses at December 31, 2020. The unrealized losses on these investments were caused by increases in interest rates and reflected aggregate depreciation from amortized cost of 0.13%. The expected present value of future cash flows is expected to approximate the contractual cash flows. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment.

 

The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2020, because the decline in market value is attributable to increases in interest rates and not credit quality, the Company does not intend to sell the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

 

Other-than-Temporary Impairment

The Bank recognizes other-than-temporary impairment (OTTI) in accordance with ASC Topic 320, Investments Debt and Equity Securities, which requires that the Bank assess whether it intends to sell or it is more likely than not that the Bank will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired, and that the Bank does not intend to sell and will not be required to sell prior to anticipated recovery of the amortized cost basis, the amount of the impairment is separated into the amount that is credit-related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is not required to be recognized as a loss in the consolidated statements of income, but is recognized in other comprehensive income (loss).

 

27

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

4.

SECURITIES – CONTINUED

 

The Bank believes that it will fully collect the carrying value of securities on which it has recorded a noncredit-related impairment in other comprehensive income (loss). The Bank held no investments with an other-than-temporary impairment at December 31, 2020 and 2019.

 

Restrictive Equity Securities Investment

The aggregate carrying value of the Company's cost-method investments totaled $281,500 and $274,900 at December 31, 2020 and 2019, respectively. These investments were not evaluated for impairment because (1) the Company did not estimate the fair value of these investments in accordance with ASC Topic 825 and (2) the Company did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments. The Company estimated that the fair value exceeded the cost of investments (that is, the investments were not impaired).

 

The investment in Cheaha Statutory Trust I represents the Company's capitalization of a subsidiary trust created to issue preferred securities. This investment represents 100% of the common stock issued by the trust; however, in accordance with the provisions of ASC Topic 810, this subsidiary has not been consolidated into these consolidated financial statements (Note 8).

 

The carrying amounts of other investment securities as shown in the consolidated statements of financial condition at December 31, 2020 and 2019, were as follows:

 

    2020     2019  
                 
Federal Home Loan Bank   $ 188,500       181,900  
Cheaha Statutory Trust I     93,000       93,000  
                 
    $ 281,500     $ 274,900  

 

28

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS

 

The Bank grants loans to customers primarily in the east Alabama counties of Calhoun, Cleburne, Etowah, and Talladega. The composition of loans by primary loan classification and by performing and impaired loan status at December 31, 2020 and 2019, are as follows:

 

   

December 31, 2020

 
   

Performing

   

Impaired

         
   

Loans

   

Loans

   

Total

 

Commercial, financial, and agricultural

  $ 23,567,064     $ 153,107     $ 23,720,171  

Real estate – construction, land development, and other land

    16,433,028       151,492       16,584,520  

Real estate – mortgage

    76,022,648       2,924,778       78,947,426  

Consumer

    8,480,776       114,469       8,595,245  
                         

Subtotal

    124,503,516       3,343,846       127,847,362  

Allowance for loan losses

    (926,241 )     (425,650 )     (1,351,891 )
                         

Net loans

  $ 123,577,275     $ 2,918,196     $ 126,495,471  

 

 

   

December 31, 2019

 
   

Performing

   

Impaired

         
   

Loans

   

Loans

   

Total

 

Commercial, financial, and agricultural

  $ 14,994,847     $ 177,418     $ 15,172,265  

Real estate – construction, land development, and other land

    17,150,728       92,919       17,243,647  

Real estate – mortgage

    76,568,245       3,261,700       79,829,945  

Consumer

    8,708,700       90,166       8,798,866  
                         

Subtotal

    117,422,520       3,622,203       121,044,723  

Allowance for loan losses

    (964,968 )     (473,465 )     (1,438,433 )
                         

Net loans

  $ 116,457,552     $ 3,148,738     $ 119,606,290  

 

29

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS CONTINUED

 

Allowance for Loan Losses

 

The changes in the allowance for loan losses for the years ended December 31, 2020 and 2019, are as follows:

 

   

2020

   

2019

 

Balance at beginning of year

  $ 1,438,433     $ 1,645,227  
                 

Loans charged off

    (89,467 )     (236,292 )

Recoveries on loans previously charged off

    2,925       29,498  
                 

Net charge-offs

    (86,542 )     (206,794 )

Provision charged to operating expenses

           
                 

Balance at end of year

  $ 1,351,891     $ 1,438,433  

 

The allocation and changes in the allowance for loan losses, by loan classification, as of and for the years ended December 31, 2020 and 2019, are as follows:

 

    December 31, 2020  
   

Commercial,

Financial, and

Agricultural

   

Real Estate

Construction,

Land

Development,

and Other

Land

   

Real Estate

Mortgage

    Consumer     Unallocated     Total  
                                                 

Balance at beginning of year

  $ 95,947     $ 1,696     $ 444,791     $ 112,834     $ 783,165     $ 1,438,433  
                                                 
Charge-offs                 (34,904 )     (54,563 )           (89,467 )
Recoveries     445       79             2,401             2,925  
                                                 
Net charge-offs     445       79       (34,904 )     (52,162 )           (86,542 )
Provision     153,168       50,222       78,723       116,406       (398,519 )      
                                                 
Ending balance   $ 249,560     $ 51,997     $ 488,610     $ 177,078     $ 384,646     $ 1,351,891  

 

30

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS CONTINUED

 

    December 31, 2019  
           

Real Estate

                                 
           

Construction,

                                 
   

Commercial,

   

Land

Development,

                                 
   

Financial, and

   

and Other

   

Real Estate

                         
   

Agricultural

   

Land

   

Mortgage

   

Consumer

   

Unallocated

   

Total

 

Balance at beginning of year

  $ 91,678     $ 14,723     $ 500,786     $ 123,640     $ 914,400     $ 1,645,227  
                                                 

Charge-offs

    (17,664 )           (191,881 )     (26,747 )           (236,292 )

Recoveries

    170             4,500       24,828             29,498  
                                                 

Net charge-offs

    (17,494 )           (187,381 )     (1,919 )           (206,794 )

Provision

    21,763       (13,027 )     131,386       (8,887 )     (131,235 )      
                                                 

Ending balance

  $ 95,947     $ 1,696     $ 444,791     $ 112,834     $ 783,165     $ 1,438,433  

 

Loan Risk Rating

The following table outlines the amount of each loan classification based on internally assigned risk ratings as of December 31, 2020 and 2019:

 

    December 31, 2020  
   

Commercial,

Financial, and

Agricultural

   

Real Estate

Construction,

Land

Development,

and Other

Land

   

Real Estate

Mortgage

    Consumer     Total  
                                         

Pass*

  $ 23,567,064     $ 16,433,028     $ 76,022,648     $ 8,480,776     $ 124,503,516  

Special mention – impaired

    12,911             214,481             227,392  

Substandard – impaired

    140,196       151,492       2,710,297       114,469       3,116,454  
                                         
    $ 23,720,171     $ 16,584,520     $ 78,947,426     $ 8,595,245     $ 127,847,362  

 

* Loans graded as minimal risk, modest risk, and some risk, but sound loans are classified as “Pass” grade for disclosure purposes.

 

31

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS CONTINUED

 

    December 31, 2019  
   

Commercial,

Financial, and Agricultural

   

Real Estate

Construction,

Land

Development,

and Other Land

   

Real Estate

Mortgage

    Consumer     Total  
                                         

Pass*

  $ 14,994,847     $ 17,150,728     $ 76,568,245     $ 8,708,700     $ 117,422,520  

Special mention – impaired

    15,018             158,770             173,788  

Substandard – impaired

    162,400       92,919       3,102,930       90,166       3,448,415  
                                         
    $ 15,172,265     $ 17,243,647     $ 79,829,945     $ 8,798,866     $ 121,044,723  

 

* Loans graded as minimal risk, modest risk, and some risk, but sound loans are classified as “Pass” grade for disclosure purposes.

 

32

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS CONTINUED

 

Impaired Loans

The following table details the recorded investments, unpaid principal balance, and the related allowance of impaired loans as of December 31, 2020 and 2019, and the average recorded investment of impaired loans for the years ended December 31, 2020 and 2019:

 

    December 31, 2020    

For the Year Ended

December 31, 2020

 
   

Recorded

Investment

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Recorded

Investment

 
Impaired loans with no recorded allowance:                                

Commercial, financial, and agricultural

  $ 649     $ 649     $     $ 4,171  

Real estate – construction, land development, and other land

    94,880       94,654             94,276  

Real estate – mortgage

    1,141,411       1,140,926             1,142,494  
                                 

Total

    1,236,940       1,236,229             1,240,941  
                                 
Impaired loans with a recorded allowance:                                

Commercial, financial, andagricultural

    153,203       152,458       14,013       147,229  

Real estate – construction, land development and other land

    58,273       56,838       8,526       54,990  

Real estate – mortgage

    1,811,854       1,783,852       336,563       1,813,258  

Consumer

    115,196       114,469       66,548       100,594  
                                 

Total

    2,138,526       2,107,617       425,650       2,116,071  
                                 

Total impaired loans

  $ 3,375,466     $ 3,343,846     $ 425,650     $ 3,357,012  

 

33

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS CONTINUED

 

    December 31, 2019    

For the Year Ended

December 31, 2019

 
   

Recorded

Investment

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Recorded

Investment

 
Impaired loans with no recorded allowance:                                

Real estate – construction, land development, and other land

  $ 93,671     $ 92,919     $     $ 46,836  

Real estate – mortgage

    1,143,577       1,140,361             1,150,569  
                                 

Total

    1,237,248       1,233,280             1,197,405  
                                 
Impaired loans with a recorded allowance:                                

Commercial, financial, and agricultural

    178,712       177,418       25,478       188,262  

Real estate – mortgage

    2,146,799       2,121,339       379,544       2,232,624  

Consumer

    90,351       90,166       68,443       83,962  
                                 

Total

    2,415,862       2,388,923       473,465       2,504,848  
                                 

Total impaired loans

  $ 3,653,110     $ 3,622,203     $ 473,465     $ 3,702,253  

 

Past Due Loan

Past due balances and loans on nonaccrual status at December 31, 2020 and 2019, by loan classification, are as follows:

 

    December 31, 2020  
   

Past Due

30-89 Days

and Still

Accruing

   

Past Due 90

Days or More

and Still

Accruing

   

 

Total Past Due

and

Performing

   

 

Loans on

Nonaccrual

Status

    Current     Total Loans  
                                                 
Commercial, financial, and agricultural   $ 73,947     $     $ 73,947     $     $ 23,646,224     $ 23,720,171  

Real estate – construction, land development, and other land

          56,838       56,838             16,527,682       16,584,520  

Real estate – mortgage

    700,343       60,436       760,779             78,186,647       78,947,426  

Consumer

    38,488             38,488             8,556,757       8,595,245  
                                                 

Total

  $ 812,778     $ 117,274     $ 930,052     $     $ 126,917,310     $ 127,847,362  

 

 

34

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

5.

LOANS – CONTINUED

 

    December 31, 2019   
   

Past Due

30-89 Days

and Still

Accruing

   

Past Due 90

Days or More

and Still

Accruing

   

Total Past Due

and

Performing

   

Loans on

Nonaccrual

Status

   

Current

   

Total Loans

 

Commercial, financial, and agricultural

  $ 34,692     $ 3,490     $ 38,182     $     $ 15,134,083     $ 15,172,265  

Real estate – construction, land development, and other land

                            17,243,647       17,243,647  

Real estate – mortgage

    203,380       75,035       278,415             79,551,530       79,829,945  

Consumer

    103,566             103,566             8,695,300       8,798,866  
                                                 

Total

  $ 341,638     $ 78,525     $ 420,163     $     $ 120,624,560     $ 121,044,723  

 

At December 31, 2020 and 2019, there were no loans classified as nonaccrual. At the date, such loans were placed on nonaccrual status, the Bank reversed all previously accrued interest income against current year earnings. Had such nonaccrual loans been on accrual status, the increase in interest income would have been immaterial for the years ended December 31, 2020 and 2019. Interest income is subsequently recognized to the extent cash payments are received while the loan is classified as nonaccrual, but is reviewed on a loan-by-loan basis.

 

The Bank has no commitments to loan additional funds to the borrowers of impaired loans.

 

The Bank reviewed all loans that met the following criteria at December 31, 2020 and 2019, for impairment: all loans greater than $500,000 and all loan relationships rated special mention or worse. At December 31, 2020 and 2019, approximately $26 million and $21 million in loans, respectively, was evaluated for impairment.

 

TDRs are modified loans in which a concession is provided to a borrower experiencing financial difficulty. As provided in the CARES Act passed into law on March 27, 2020, certain loan modifications related to the COVID-19 pandemic beginning March 1, 2020, are eligible for relief from TDR classification. The Company elected this provision of the CARES Act; therefore, modified loans that met the required guidelines for relief are not considered. As of December 31, 2020 and 2019, the Bank had no loans classified as TDRs. There were no TDRs that subsequently defaulted during the years ended December 31, 2020 and 2019.

 

35

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

6.

PREMISES AND EQUIPMENT

 

Premises and equipment at December 31, 2020 and 2019, is as follows:

 

    2020    

2019

 

Land improvements

  $ 172,405     $ 172,405  

Building

    3,529,730       3,529,730  

Computer hardware and software

    674,038       674,038  

Furniture and equipment

    1,141,208       1,141,208  

Automobile

    33,550        
      5,550,931       5,517,381  

Accumulated depreciation

    (3,104,606 )     (2,939,509 )

Land

    1,468,413       1,468,413  
                 
Premises and equipment, net   $ 3,914,738     $ 4,046,285  

 

The provision for depreciation charged to occupancy and equipment expense for the years ended December 31, 2020 and 2019, was $165,097 and $167,351, respectively.

 

 

7.

DEPOSITS

 

The aggregate amount of time deposits of $250,000 or more at December 31, 2020 and 2019, was $37,235,329 and $34,408,968, respectively.

 

Demand deposits reclassified as loan balances (overdrafts) as of December 31, 2020 and 2019, amounted to $18,171 and $35,508, respectively.

 

The maturities of time certificates of deposit and other time deposits issued by the Bank at December 31, 2020, are as follows:

 

Years Ending December 31, 2021        
2021   $ 68,373,525  
2022     12,841,325  
2023     5,076,341  
2024     6,474,977  
2025     1,643,698  
         
    $ 94,409,866  

 

Deposits also include the deposits of a local government entity with account balances totaling $26,532,543 and $26,135,168 at December 31, 2020 and 2019, respectively.

 

36

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

8.

BORROWINGS

 

Long-term debt consists of the following at December 31, 2020 and 2019:

 

    2020     2019  

Long-term capital note from Cheaha Statutory Trust I, from a pooled trust preferred private placement for subordinated debentures, dated August 4, 2005, bearing interest at a fixed rate of 6.235% for five years, then floating at LIBOR plus 1.70% (1.937% and 3.608% at December 31, 2020 and 2019, respectively). The subordinated debenture has a 30-year life with a call option of five years, subject to regulatory approval, or earlier, dependent upon certain changes in tax or investment company laws or regulatory capital requirements.

  $ 3,093,000     $ 3,093,000  
                 
    $ 3,093,000     $ 3,093,000  

 

In August 2005, Cheaha Statutory Trust I (the Trust), a Delaware statutory trust established by the Company, received $3,000,000 principal amount of the Trust's floating rate cumulative trust preferred securities (the Trust Preferred Securities) in a trust preferred private placement. The proceeds of that transaction were then used by the Trust to purchase an equal amount of floating rate subordinated debentures (the Subordinated Debentures) of the Company. The Company has fully and unconditionally guaranteed all obligations of the Trust on a subordinated basis with respect to the Trust Preferred Securities. In accordance with the provisions of ASC Topic 810,  the Company accounts for the Trust Preferred Securities as a long-term debt liability to the Trust. Subject to certain limitations, the Trust Preferred Securities qualify as Tier 1 capital.

 

The sole asset of the Trust is the Subordinated Debenture issued by the Company. Both the Trust Preferred Securities and the Subordinated Debentures have approximately 30-year lives. However, both the Company and the Trust have options to call their respective securities after five years, subject to regulatory capital requirements.

 

37

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

8.

BORROWINGS – CONTINUED

 

Maturities of long-term debt following December 31, 2020, are as follows:

 

Years Ending December 31,

       

2021

  $  

2022

     

2023

     

2024

     

2025

     
Thereafter     3,093,000  
         
    $ 3,093,000  

                                               

 

9.

INCOME TAXES

 

Federal and state income taxes receivable (payable) as of December 31, 2020 and 2019, included in other assets and other liabilities, were as follows:

      

    2020     2019  
Current:                

Federal

  $ (85,219 )   $ 5,788  

State

    (8,553 )     (187,725 )

 

38

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

9.

INCOME TAXES CONTINUED

 

The components of the net deferred income tax asset as of December 31, 2020 and 2019, are as follows:

 

 

 

2020

   

2019

 
Deferred income tax asset:                

Federal

  $ 615,305     $ 543,921  

State

    175,674       155,759  
                 

Total deferred income tax asset

    790,979       699,680  
                 
Deferred income tax liability:                

Federal

    (618,811 )     (256,257 )

State

    (176,818 )     (73,141 )
                 

Total deferred income tax liability

    (795,629 )     (329,398 )
                 

Net deferred tax asset

  $ (4,650 )   $ 370,282  

 

The tax effects of each type of income and expense item that gave rise to deferred taxes are:

 

   

2020

   

2019

 

Net unrealized (gains)/losses on securities available-for-sale

  $ (729,650 )   $ (253,718 )

Allowance for loan losses

    335,681       347,561  

Nonqualified deferred compensation

    276,997       284,959  

Deferred change in control compensation

    108,000        

Deferred origination fees

    69,854       66,807  

Depreciation

    (65,963 )     (75,414 )

Other

    431       87  
                 

Net deferred tax asset

  $ (4,650 )   $ 370,282  

 

Additionally, deferred tax assets are subject to a “more likely than not” test. If the “more likely than not” test is not met, a valuation allowance must be established against the deferred tax asset. The Company believes that it is “more likely than not” that the deferred tax asset, net of the valuation allowance, will be realized.

 

39

 

 

CHEAHA FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

 


 

9.

INCOME TAXES CONTINUED

 

The components of income tax expense for the years ended December 31, 2020 and 2019, were as follows:

 

 

 

2020

   

2019

 
Current:                

Federal

  $ 501,779     $ 416,544  

State

    198,553       187,725  
                 
Deferred:                

Federal

    (79,000 )     20,000  

State

    (22,000 )     5,000