Citizens Community Bancorp Inc. - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number 001-33003
CITIZENS COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
| Maryland | 20-5120010 | |||||||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) | |||||||
2174 EastRidge Center
Eau Claire, WI 54701
(Address and Zip Code of principal executive offices)
715-836-9994
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $.01 par value per share | CZWI | NASDAQ Global Market | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☒ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At November 6, 2020 there were 11,154,563 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
CITIZENS COMMUNITY BANCORP, INC.
FORM 10-Q
September 30, 2020
INDEX
| Page Number | |||||||||||
Item 1. | |||||||||||
Item 2. | |||||||||||
Item 3. | |||||||||||
Item 4. | |||||||||||
Item 1. | |||||||||||
Item 1A. | |||||||||||
Item 2. | |||||||||||
Item 3. | |||||||||||
Item 4. | |||||||||||
Item 5. | |||||||||||
Item 6. | |||||||||||
3
PART 1 – FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
4
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Balance Sheets
September 30, 2020 (unaudited) and December 31, 2019
(derived from audited financial statements)
(in thousands, except share and per share data)
| September 30, 2020 | December 31, 2019 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 115,474 | $ | 55,840 | |||||||
| Other interest-bearing deposits | 3,752 | 4,744 | |||||||||
| Securities available for sale "AFS" | 150,908 | 180,119 | |||||||||
| Securities held to maturity "HTM" | 16,927 | 2,851 | |||||||||
| Equity securities with readily determinable fair value | 187 | 246 | |||||||||
| Other investments | 15,075 | 15,005 | |||||||||
| Loans receivable | 1,230,139 | 1,177,380 | |||||||||
| Allowance for loan losses | (14,836) | (10,320) | |||||||||
| Loans receivable, net | 1,215,303 | 1,167,060 | |||||||||
| Loans held for sale | 4,938 | 5,893 | |||||||||
| Mortgage servicing rights | 3,498 | 4,282 | |||||||||
| Office properties and equipment, net | 21,607 | 21,106 | |||||||||
| Accrued interest receivable | 5,829 | 4,738 | |||||||||
| Intangible assets | 5,893 | 7,587 | |||||||||
| Goodwill | 31,498 | 31,498 | |||||||||
| Foreclosed and repossessed assets, net | 812 | 1,460 | |||||||||
| Bank owned life insurance ("BOLI") | 23,514 | 23,063 | |||||||||
| Other assets | 7,378 | 5,757 | |||||||||
| TOTAL ASSETS | $ | 1,622,593 | $ | 1,531,249 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Deposits | $ | 1,270,778 | $ | 1,195,702 | |||||||
| Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) advances | 124,491 | 130,971 | |||||||||
| Other borrowings | 58,297 | 43,560 | |||||||||
| Other liabilities | 11,704 | 10,463 | |||||||||
| Total liabilities | 1,465,270 | 1,380,696 | |||||||||
| Stockholders’ Equity: | |||||||||||
Common stock—$0.01 par value, authorized 30,000,000; 11,154,645 and 11,266,954 shares issued and outstanding, respectively | 112 | 113 | |||||||||
| Additional paid-in capital | 127,778 | 128,856 | |||||||||
| Retained earnings | 29,239 | 22,517 | |||||||||
| Unearned deferred compensation | (710) | (462) | |||||||||
| Accumulated other comprehensive income (loss) | 904 | (471) | |||||||||
| Total stockholders’ equity | 157,323 | 150,553 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,622,593 | $ | 1,531,249 | |||||||
See accompanying condensed notes to unaudited consolidated financial statements.
5
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended September 30, 2020 and 2019
(in thousands, except per share data)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | ||||||||||||||||||||
| Interest and dividend income: | |||||||||||||||||||||||
| Interest and fees on loans | $ | 14,154 | $ | 14,646 | $ | 44,300 | $ | 40,036 | |||||||||||||||
| Interest on investments | 1,064 | 1,577 | 3,712 | 4,241 | |||||||||||||||||||
| Total interest and dividend income | 15,218 | 16,223 | 48,012 | 44,277 | |||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||
| Interest on deposits | 2,255 | 3,371 | 8,042 | 8,890 | |||||||||||||||||||
| Interest on FHLB and FRB borrowed funds | 430 | 639 | 1,386 | 2,213 | |||||||||||||||||||
| Interest on other borrowed funds | 624 | 620 | 1,701 | 1,436 | |||||||||||||||||||
| Total interest expense | 3,309 | 4,630 | 11,129 | 12,539 | |||||||||||||||||||
| Net interest income before provision for loan losses | 11,909 | 11,593 | 36,883 | 31,738 | |||||||||||||||||||
| Provision for loan losses | 1,500 | 575 | 5,250 | 2,125 | |||||||||||||||||||
| Net interest income after provision for loan losses | 10,409 | 11,018 | 31,633 | 29,613 | |||||||||||||||||||
| Non-interest income: | |||||||||||||||||||||||
| Service charges on deposit accounts | 431 | 625 | 1,336 | 1,756 | |||||||||||||||||||
| Interchange income | 556 | 476 | 1,509 | 1,267 | |||||||||||||||||||
| Loan servicing income | 1,144 | 714 | 3,144 | 1,902 | |||||||||||||||||||
| Gain on sale of loans | 1,987 | 679 | 4,585 | 1,560 | |||||||||||||||||||
| Loan fees and service charges | 320 | 471 | 1,041 | 860 | |||||||||||||||||||
| Insurance commission income | — | 197 | 474 | 573 | |||||||||||||||||||
| Net gains (losses) on investment securities | (1) | 96 | 97 | 151 | |||||||||||||||||||
| Net gain (loss) on sale of branch | — | — | — | 2,295 | |||||||||||||||||||
| Net gain (loss) on sale of acquired business lines | 180 | — | 432 | — | |||||||||||||||||||
| Settlement proceeds | — | — | 131 | — | |||||||||||||||||||
| Other | 445 | 363 | 929 | 827 | |||||||||||||||||||
| Total non-interest income | 5,062 | 3,621 | 13,678 | 11,191 | |||||||||||||||||||
| Non-interest expense: | |||||||||||||||||||||||
| Compensation and related benefits | 5,538 | 5,295 | 16,881 | 14,605 | |||||||||||||||||||
| Occupancy | 993 | 905 | 2,898 | 2,725 | |||||||||||||||||||
| Office | 532 | 599 | 1,650 | 1,649 | |||||||||||||||||||
| Data processing | 1,145 | 1,092 | 3,165 | 2,953 | |||||||||||||||||||
| Amortization of intangible assets | 399 | 412 | 1,223 | 1,085 | |||||||||||||||||||
| Mortgage servicing rights expense | 603 | 325 | 2,330 | 822 | |||||||||||||||||||
| Advertising, marketing and public relations | 260 | 315 | 802 | 974 | |||||||||||||||||||
| FDIC premium assessment | 188 | 78 | 436 | 318 | |||||||||||||||||||
| Professional services | 434 | 561 | 1,391 | 1,961 | |||||||||||||||||||
| Gain on repossessed assets, net | (105) | (16) | (195) | (143) | |||||||||||||||||||
| Other | 737 | 3,409 | 2,266 | 5,309 | |||||||||||||||||||
| Total non-interest expense | 10,724 | 12,975 | 32,847 | 32,258 | |||||||||||||||||||
| Income before provision for income tax | 4,747 | 1,664 | 12,464 | 8,546 | |||||||||||||||||||
| Provision for income taxes | 1,267 | 430 | 3,309 | 2,252 | |||||||||||||||||||
| Net income attributable to common stockholders | $ | 3,480 | $ | 1,234 | $ | 9,155 | $ | 6,294 | |||||||||||||||
| Per share information: | |||||||||||||||||||||||
| Basic earnings | $ | 0.31 | $ | 0.11 | $ | 0.82 | $ | 0.57 | |||||||||||||||
| Diluted earnings | $ | 0.31 | $ | 0.11 | $ | 0.82 | $ | 0.57 | |||||||||||||||
| Cash dividends paid | $ | — | $ | — | $ | 0.21 | $ | 0.20 | |||||||||||||||
See accompanying condensed notes to unaudited consolidated financial statements.
6
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Comprehensive Income (unaudited)
Three and Nine months ended September 30, 2020 and 2019
(in thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 3,480 | $ | 1,234 | $ | 9,155 | $ | 6,294 | ||||||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||||||||
| Net unrealized gains arising during period | 885 | 319 | 1,488 | 2,177 | ||||||||||||||||||||||
| Reclassification adjustment for net gains included in net income | — | — | (113) | (19) | ||||||||||||||||||||||
| Other comprehensive income | 885 | 319 | 1,375 | 2,158 | ||||||||||||||||||||||
| Comprehensive income | $ | 4,365 | $ | 1,553 | $ | 10,530 | $ | 8,452 | ||||||||||||||||||
See accompanying condensed notes to unaudited consolidated financial statements.
7
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Nine Months Ended September 30, 2020
(in thousands, except shares and per share data)
| Additional Paid-In Capital | Retained Earnings | Unearned Deferred Compensation | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2020 | 11,266,954 | $ | 113 | $ | 128,856 | $ | 22,517 | $ | (462) | $ | (471) | $ | 150,553 | ||||||||||||||||||||||||||||
| Net income | — | — | — | 2,606 | — | — | 2,606 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | (1,138) | (1,138) | ||||||||||||||||||||||||||||||||||
| Surrender of restricted shares of common stock | (1,746) | — | (21) | — | — | — | (21) | ||||||||||||||||||||||||||||||||||
| Common stock awarded under the equity incentive plan | 41,507 | — | 669 | — | (669) | — | — | ||||||||||||||||||||||||||||||||||
| Common stock fractional share audit adjustment | (40) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Common stock repurchased | (155,666) | (1) | (1,776) | (61) | — | — | (1,838) | ||||||||||||||||||||||||||||||||||
| Stock option expense | — | — | 4 | — | — | — | 4 | ||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | — | — | — | — | 139 | — | 139 | ||||||||||||||||||||||||||||||||||
Cash dividends ($0.21 per share) | — | — | — | (2,372) | — | — | (2,372) | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | 11,151,009 | 112 | 127,732 | 22,690 | (992) | (1,609) | 147,933 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 3,069 | — | — | 3,069 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 1,628 | 1,628 | ||||||||||||||||||||||||||||||||||
| Surrender of restricted shares of common stock | (314) | — | (2) | — | — | — | (2) | ||||||||||||||||||||||||||||||||||
| Stock option expense | — | — | 4 | — | — | — | 4 | ||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | — | — | — | — | 158 | — | 158 | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 11,150,695 | 112 | 127,734 | 25,759 | (834) | 19 | 152,790 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 3,480 | — | — | 3,480 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 885 | 885 | ||||||||||||||||||||||||||||||||||
| Surrender of restricted shares of common stock | (50) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Common stock awarded under the equity incentive plan | 4,000 | — | 41 | — | (41) | — | — | ||||||||||||||||||||||||||||||||||
| Stock option expense | — | — | 3 | — | — | — | 3 | ||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | — | — | — | — | 165 | — | 165 | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 11,154,645 | $ | 112 | $ | 127,778 | $ | 29,239 | $ | (710) | $ | 904 | $ | 157,323 | ||||||||||||||||||||||||||||
See accompanying condensed notes to unaudited consolidated financial statements.
8
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Twelve Months Ended December 31, 2019
(in thousands, except shares and per share data)
| Additional Paid-In Capital | Retained Earnings | Unearned Deferred Compensation | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2019 | 10,953,512 | $ | 109 | $ | 125,512 | $ | 15,264 | $ | (857) | $ | (1,841) | $ | 138,187 | ||||||||||||||||||||||||||||
| Net income | — | — | — | 953 | — | — | 953 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 1,164 | 1,164 | ||||||||||||||||||||||||||||||||||
| Forfeiture of unvested shares | (958) | — | (13) | — | 13 | — | — | ||||||||||||||||||||||||||||||||||
| Surrender of restricted shares of common stock | (798) | — | (9) | — | — | — | (9) | ||||||||||||||||||||||||||||||||||
| Common stock awarded under the equity incentive plan | 10,847 | — | 252 | — | (252) | — | — | ||||||||||||||||||||||||||||||||||
| Common stock options exercised | 27,430 | 1 | 194 | — | — | — | 195 | ||||||||||||||||||||||||||||||||||
| Stock option expense | — | — | 4 | — | — | — | 4 | ||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | — | — | — | — | 140 | — | 140 | ||||||||||||||||||||||||||||||||||
Adoption of ; Equity securities | — | — | — | 45 | — | (45) | — | ||||||||||||||||||||||||||||||||||
Adoption of ASU 2016-02; Leases | — | — | — | (56) | — | — | (56) | ||||||||||||||||||||||||||||||||||
Cash dividends ($0.20 per share) | — | — | — | (2,198) | — | — | (2,198) | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2019 | 10,990,033 | 110 | 125,940 | 14,008 | (956) | (722) | 138,380 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 4,107 | — | — | 4,107 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 675 | 675 | ||||||||||||||||||||||||||||||||||
| Forfeiture of unvested shares | (7,958) | — | (118) | — | 118 | — | — | ||||||||||||||||||||||||||||||||||
| Surrender of restricted shares of common stock | (3,067) | — | (35) | — | — | — | (35) | ||||||||||||||||||||||||||||||||||
| Common stock awarded under the equity incentive plan | 2,000 | — | 22 | — | (22) | — | — | ||||||||||||||||||||||||||||||||||
| Common stock options exercised | 1,000 | — | 8 | — | — | — | 8 | ||||||||||||||||||||||||||||||||||
| Stock option expense | — | — | 5 | — | — | — | 5 | ||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | — | — | — | — | 103 | — | 103 | ||||||||||||||||||||||||||||||||||
Adoption of ASU 2016-02; Leases | — | — | — | (1) | — | — | (1) | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | 10,982,008 | 110 | 125,822 | 18,114 | (757) | (47) | 143,242 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 1,234 | — | — | 1,234 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 319 | 319 | ||||||||||||||||||||||||||||||||||
| Surrender of restricted shares of common stock | (297) | — | (3) | — | — | — | (3) | ||||||||||||||||||||||||||||||||||
| Common stock issued to F&M shareholders | 288,999 | 3 | 3,102 | — | — | — | 3,105 | ||||||||||||||||||||||||||||||||||
| Stock option expense | — | — | 5 | — | — | — | 5 | ||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | — | — | — | — | 127 | — | 127 | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2019 | 11,270,710 | 113 | 128,926 | 19,348 | (630) | 272 | 148,029 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 3,169 | — | — | 3,169 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | (743) | (743) | ||||||||||||||||||||||||||||||||||
| Forfeiture of unvested shares | (3,251) | — | (68) | — | 68 | — | — | ||||||||||||||||||||||||||||||||||
| Surrender of restricted shares of common stock | (505) | — | (6) | — | — | — | (6) | ||||||||||||||||||||||||||||||||||
| Stock option expense | — | — | 4 | — | — | — | 4 | ||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | — | — | — | — | 100 | — | 100 | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 11,266,954 | $ | 113 | $ | 128,856 | $ | 22,517 | $ | (462) | $ | (471) | $ | 150,553 | ||||||||||||||||||||||||||||
See accompanying condensed notes to unaudited consolidated financial statements.
9
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2020 and 2019
(in thousands)
| Nine Months Ended | |||||||||||
| September 30, 2020 | September 30, 2019 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income attributable to common stockholders | $ | 9,155 | $ | 6,294 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Premium amortization, net of discount accretion on investment securities | 156 | 762 | |||||||||
| Depreciation expense | 1,436 | 1,110 | |||||||||
| Provision for loan losses | 5,250 | 2,125 | |||||||||
| Net realized loss (gain) on equity securities | 59 | (125) | |||||||||
| Net realized gain on debt securities | (156) | (26) | |||||||||
| Increase in MSR assets resulting from transfers of financial assets | (1,546) | (581) | |||||||||
| Mortgage servicing rights expense | 2,330 | 822 | |||||||||
| Amortization of intangible assets | 1,223 | 1,085 | |||||||||
| Amortization of restricted stock | 462 | 370 | |||||||||
| Net stock based compensation expense | 11 | 14 | |||||||||
| Loss (gain) on sale of office properties and equipment | 30 | (32) | |||||||||
| Deferred income taxes | (1,299) | — | |||||||||
| Increase in cash surrender value of life insurance | (451) | (384) | |||||||||
| Net (gain) loss from disposals of foreclosed and repossessed assets | (195) | (143) | |||||||||
| Gain on sale of loans held for sale, net | (4,585) | (1,560) | |||||||||
| Net change in loans held for sale | 5,540 | 225 | |||||||||
| Decrease in accrued interest receivable and other assets | (1,934) | 3,009 | |||||||||
| Increase (decrease) in other liabilities | 836 | (6,482) | |||||||||
| Net gain on sale of insurance agency | (252) | — | |||||||||
| Total adjustments | 6,915 | 189 | |||||||||
| Net cash provided by operating activities | 16,070 | 6,483 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Net decrease in other interest-bearing deposits | 992 | 3,207 | |||||||||
| Purchase of available for sale securities | (20,956) | (23,457) | |||||||||
| Purchase of held to maturity securities | (15,147) | — | |||||||||
| Proceeds from principal payments and sale of available for sale securities | 52,083 | 26,370 | |||||||||
| Proceeds from principal payments and maturities of held to maturity securities | 1,051 | 1,185 | |||||||||
| Net sales of other investments | (70) | 1,084 | |||||||||
| Proceeds from sale of foreclosed and repossessed assets | 2,098 | 2,238 | |||||||||
| Net increase in loans | (54,748) | (6,710) | |||||||||
| Net capital expenditures | (1,975) | (6,149) | |||||||||
| Net cash (disbursed) acquired in business combinations | — | (8,137) | |||||||||
| Proceeds from disposal of office properties and equipment | 8 | 300 | |||||||||
| Net proceeds from sale of insurance agency | 1,128 | — | |||||||||
| Net cash used in investing activities | (35,536) | (10,069) | |||||||||
10
| Cash flows from financing activities: | |||||||||||
| Net (decrease) increase in short-term Federal Home Loan Bank advances | (40,980) | (16,469) | |||||||||
| Long-term Federal Home Loan Bank advances | 66,500 | — | |||||||||
| Long-term Federal Home Loan Bank maturities | (32,000) | — | |||||||||
| Amortization of debt issuance costs | 60 | — | |||||||||
| Proceeds from other borrowings, net of origination costs | 14,677 | — | |||||||||
| Proceeds from other borrowings to fund business combination, net of origination costs | — | 29,889 | |||||||||
| Principal payment reduction to other borrowings | — | (10,000) | |||||||||
| Net increase in deposits | 75,076 | 5,601 | |||||||||
| Common stock issued in F&M acquisition less capitalized equity costs | — | 3,105 | |||||||||
| Repurchase shares of common stock | (1,838) | — | |||||||||
| Surrender of restricted shares of common stock | (23) | (47) | |||||||||
| Common stock options exercised | — | 203 | |||||||||
| Cash dividends paid | (2,372) | (2,198) | |||||||||
| Net cash provided by financing activities | 79,100 | 10,084 | |||||||||
| Net (decrease) increase in cash and cash equivalents | 59,634 | 6,498 | |||||||||
| Cash and cash equivalents at beginning of period | 55,840 | 45,778 | |||||||||
| Cash and cash equivalents at end of period | $ | 115,474 | $ | 52,276 | |||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest on deposits | $ | 8,066 | $ | 8,775 | |||||||
| Interest on borrowings | $ | 2,999 | $ | 3,966 | |||||||
| Income taxes | $ | 4,820 | $ | 3,847 | |||||||
| Supplemental noncash disclosure: | |||||||||||
| Transfers from loans receivable to foreclosed and repossessed assets | $ | 1,057 | $ | 898 | |||||||
| Fair value of assets acquired, net of cash and cash equivalents | $ | — | $ | 177,494 | |||||||
| Fair value of liabilities assumed, net of cash and cash equivalents | $ | — | $ | 169,724 | |||||||
See accompanying condensed notes to unaudited consolidated financial statements.
11
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(UNAUDITED)
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of Citizens Community Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Citizens Community Federal N.A. (the “Bank”), and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. As used in this quarterly report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning.
The Bank is a national banking association (a “National Bank”) and operates under the title of Citizens Community Federal National Association (“Citizens Community Federal N.A.” or “Bank” or “CCFBank”). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis (the “FRB”), and operates under the title of Citizens Community Bancorp, Inc. Wells Insurance Agency (“WIA”) was a wholly owned subsidiary of the Bank, providing insurance products to the Bank’s customers and was sold on June 30, 2020. F&M Investment Corp. of Tomah was a wholly owned subsidiary of the Bank that was formerly utilized by F. & M. Bancorp. of Tomah, Inc. (“F & M”) to manage its municipal bond portfolio, and has been dissolved. The U.S. Office of the Comptroller of the Currency (the “OCC”), is the primary federal regulator for the Bank.
The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers in Wisconsin and Minnesota through 28 branch locations. Its primary markets include the Chippewa Valley Region in Wisconsin, the Twin Cities and Mankato markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, agricultural operators and consumers, including one-to-four family residential mortgages.
The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.
In preparing these consolidated financial statements, we evaluated the events and transactions that occurred subsequent to the September 30, 2020 balance sheet date and through the date the financial statements were available to be issued for items that should potentially be recognized or disclosed in these consolidated financial statements.
The accompanying consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Unless otherwise stated herein, and except for shares and per share amounts, all amounts are in thousands.
Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated.
Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of intangible assets arising from acquisitions, useful lives for depreciation and amortization, valuation of goodwill and long-lived assets, stock based compensation, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: those items described under the caption “Risk Factors” in Item 1A of the annual report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 10, 2020; the matters described in “Risk Factors” in Item 1A of our Form 10-Q for the quarters ended March 31, 2020, June 30, 2020 and in Item 1A of this Form 10-Q; external market factors such as market interest rates and unemployment rates; changes to operating policies and procedures and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.
Investment Securities; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities
12
are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the Company’s net income in the period in which the losses arise. Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to: the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded in other comprehensive income or loss as separate components of stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax.
Equity securities with readily determinable fair value - The Company is required to maintain an investment in Federal Agricultural Mortgage Corporation (“Farmer Mac”) equity securities. Farmer Mac equity securities are carried at their fair market value, which is readily determinable. Changes in fair value are recognized as net gains (losses) on investment securities in the consolidated Statement of Operations.
Other Investments - As a member of the Federal Reserve Bank (“FRB”) System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as other income in the consolidated statement of operations.
Also included in other investments is stock of our correspondent bank, Bankers’ Bank, without readily determinable fair value. This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less other-than-temporary impairment charges, if any.
Management’s evaluation for impairment of these other investments, includes consideration of the financial condition and other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities. Other investments totaling $15,075 at September 30, 2020 consisted of $8,231 of FHLB stock, $5,169 of Federal Reserve Bank stock and $1,675 of Bankers’ Bank stock. Other investments totaling $15,005 at December 31, 2019 consisted of $8,196 of FHLB stock and $5,162 of Federal Reserve Bank stock and $1,647 of Bankers’ Bank stock.
Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of: deferred loan fees and costs, accretable yield on acquired loans and non-accretable discount on purchased credit impaired loans. Interest income is accrued on the unpaid principal balance of these loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments. Late charge fees are recognized into income when collected.
Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules:
•Commercial/agricultural real estate loans past due 90 days or more;
•Commercial and industrial/agricultural operating loans past due 90 days or more;
•Closed end consumer installment loans past due 120 days or more; and
•Residential mortgage loans and open ended consumer installment loans past due 180 days or more.
Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash
13
basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when payments are made that bring the loan account current with the contractual term of the loan and a six month payment history has been established. Interest on accruing troubled debt restructured (“TDR”) loans is recognized as income as it accrues, based on the revised terms of the loan over an established period of continued payment.
Residential mortgage loans and open ended consumer installment loans are charged off to estimated net realizable value less estimated selling costs at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 180 days or more. Closed ended consumer installment loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 120 days or more. Commercial/agricultural real estate, commercial and industrial and agricultural operating loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 90 days or more.
Allowance for Loan Losses – The allowance for loan losses (“ALL”) is a valuation allowance for probable and inherent credit losses in our loan portfolio. Loan losses are charged against the ALL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the required ALL balance taking into account the following factors: past loan loss experience; the nature, volume and composition of our loan portfolio; known and inherent risks in our portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; and other relevant factors determined by management. The ALL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. The entire ALL balance is available for any loan that, in management’s judgment, should be charged off.
A loan is impaired when full payment under the loan’s contractual terms is not expected. Impaired loans consist of all TDRs, as well as individual loans not considered a TDR, that are either (1) rated substandard or worse, (2) on nonaccrual status or (3) PCI loans which were deemed impaired at the time of acquisition. Substandard loans, as defined by the OCC, our primary banking regulator, are loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. All TDRs are individually evaluated for impairment. See Note 3, “Loans, Allowance for Loan Losses and Impaired Loans” for more information on what we consider to be a TDR. For TDR’s or substandard loans deemed to be impaired, a specific ALL allocation may be established so that the loan is reported, net, at the lower of (a) its outstanding principal balance; (b) the present value of the loan’s estimated future cash flows using the loan’s existing rate; or (c) at the fair value of any loan collateral, less estimated disposal costs, if repayment is expected solely from the underlying collateral of the loan. For TDRs less than 90+ days past due, and certain substandard loans that are less than 90+ days delinquent, the likelihood of the loan migrating to over 90 days past due is also taken into account when determining the specific ALL allocation for these particular loans. Large groups of smaller balance homogeneous loans, such as non-TDR commercial, consumer and residential real estate loans, are collectively evaluated for ALL purposes, and accordingly, are not separately identified for ALL disclosures.
Acquired Loans— Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for loan losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that no longer are expected to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including: the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.
Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield.
Loans acquired with deteriorated credit quality are accounted for in accordance with Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30) if, at acquisition, the loans have evidence of credit quality deterioration since origination and it is probable that all contractually required payments will not be collected. At acquisition, the Company considers several factors as indicators that an acquired loan has evidence of deterioration in credit quality. These factors include, but are not limited to: loans 90 days or more past due, loans with an internal risk grade of substandard or below, loans classified as non-accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring.
14
Under the ASC 310-30 model, the excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield and is the interest component of expected cash flow. The accretable discount is recognized into income over the remaining life of the loan if the timing and/or amount of cash flows expected to be collected can be reasonably estimated (the accretion method). If the timing or amount of cash flows expected to be collected cannot be reasonably estimated, the cost recovery method of income recognition is used. The difference between the loan’s total scheduled principal and interest payments over all cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the non-accretable difference. The non-accretable difference represents contractually required principal and interest payments which the Company does not expect to collect.
Over the life of the loan, management continues to estimate cash flows expected to be collected. Decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable discount to be subsequently recognized in interest income on a prospective basis over the loan’s remaining life.
Acquired loans that were not individually determined to be purchased with deteriorated credit quality are accounted for in accordance with ASC 310-20, Nonrefundable Fees and Other Costs (ASC 310-20), whereby the premium or discount derived from the fair market value adjustment, on a loan-by-loan or pooled basis, is recognized into interest income on a level yield basis over the remaining expected life of the loan or pool.
For all acquired loans, the outstanding loan balances less any related accretable discount and/or non-accretable difference is referred to as the loans’ carrying amount.
Loans Held for Sale — Loans held for sale are those loans the Company has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or fair value. Gains and losses on sales of loans are recognized at settlement dates, and are determined by the difference between the sales proceeds and the carrying value of the loans after allocating costs to servicing rights retained. Such gains and losses are included in non-interest income in the consolidated statements of operations. All sales are made without recourse. Interest rate lock commitments on mortgage loans to be funded and sold are valued at fair value, and are included in other assets or liabilities, if material.
Mortgage Servicing Rights— Mortgage servicing rights (“MSR”) assets result as the Company sells loans to investors in the secondary market and retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value; assessed at least annually for impairment; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations.
The valuation of MSRs and related amortization, included in amortization of mortgage servicing rights in the consolidated statements of operations, thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary, if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.
Foreclosed and Repossessed Assets, net – Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis. If the fair value declines subsequent to foreclosure or repossession, a write-down is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other in the consolidated statements of operations.
Transfers of financial assets—Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the entity, (2) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets, and (3) the entity does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
Goodwill and other intangible assets-The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. The Company does not amortize goodwill and any acquired intangible asset with an indefinite useful economic life, but reviews them for impairment at a reporting unit level on an annual basis, or when
15
events or changes in circumstances indicate that the carrying amounts may be impaired. A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of December 31, 2019 which is related to its banking activities. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of December 31, 2019. The Company performed a goodwill impairment analysis as of September 30, 2020, due to triggering events being identified, and determined that goodwill was not impaired.
Leases - We determine if an arrangement is a lease at inception. All of our existing leases have been determined to be operating leases under ASC 842. Right-of-use (“ROU”) assets are included in other assets in our consolidated balance sheets. Operating lease liabilities are included in other liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date, based on the present value of lease payments over the lease term. As none of our existing leases provide an implicit rate, we use our incremental borrowing rate, based on information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, when it is reasonably certain that we will exercise that option. Lease expense is recognized based on the total contractually required lease payments, over the term of the lease, on a straight-line basis.
Debt and equity issuance costs—Debt issuance costs, which consist primarily of fees paid to note lenders, are deferred and included in other borrowings in the consolidated balance sheet. Debt issuance costs are amortized over the contractual term of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statement of operations. Specific costs associated with the issuance of shares of the Company’s common or preferred stock are netted against proceeds and recorded in stockholders’ equity, as additional paid in capital, on the consolidated balance sheet, in the period of the share issuance.
Advertising, Marketing and Public Relations Expense—The Company expenses all advertising, marketing and public relations costs as they are incurred.
Income Taxes – The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry forward periods, any experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.
Revenue Recognition - The Company recognizes revenue in the consolidated statements of operations as it is earned and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts or other similar contracts. Non-interest income is recognized on the accrual basis of accounting as services are provided or as transactions occur. Non-interest income includes fees from deposit accounts, ATM and debit card fees, mortgage banking activities, and other miscellaneous services and transactions. Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. The Company also receives contingent commissions from insurance companies which are based on the overall profitability of their relationship based primarily on the loss experience of the insurance placed by the
16
Company. Contingent commissions from insurance companies are recognized when determinable. Commission revenue is included in other non-interest income in the consolidated statement of operations.
Earnings Per Share – Basic earnings per common share is net income or loss divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Company’s stock incentive plans that have an exercise price that is less than the Company’s stock price on the reporting date.
Operating Segments—While our executive officers monitor the revenue streams of the various banking products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.
Reclassifications – Certain items previously reported were reclassified for consistency with the current presentation.
Recent Accounting Pronouncements—The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have potentially significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.
Recent Accounting Pronouncements—Adopted
ASU 2014-09; Revenue from Contracts with Customers (Topic 606)—Under the ASU, as modified by subsequent ASUs, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the entity expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Company’s interest income and certain non-interest income items were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The Company’s largest sources of non-interest revenue which are subject to the guidance include fees and service charges on loan and deposit accounts and interchange revenue from debit card transactions. ASU 2014-09, as amended, became effective for the Company’s annual and interim periods beginning in the first quarter 2019. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as the change in the timing and pattern of the Company’s revenue recognition related to scoped-in non-interest income recognized under the newly issued ASU is consistent with the current applicable accounting guidance. The Company has made all required additional disclosures related to non-interest income in the consolidated financial statements, primarily in Revenue Recognition policy included herein in Note 1.
ASU 2016-01; Recognition and Measurement of Financial Assets and Liabilities—The guidance requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. The Company’s adoption of ASU 2016-01 as of January 1, 2019, constitutes a change in accounting principle. The Company recorded a cumulative effect adjustment to retained earnings of $45 as of January 1, 2019, as a result of implementing this new accounting standard.
ASU 2016-02; Leases (Topic 842)—The ASU changed current GAAP by requiring that lease assets and liabilities arising from operating leases be recognized on the balance sheet. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases, amending various aspects of Topic 842. Topic 842 does not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election, by class of underlying asset, not to recognize lease assets and liabilities. Topic 842 became effective for the Company for annual and interim periods beginning in the first quarter 2019.
The Company leased (1) 9 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases that resulted in the recognition of right-of-use assets and corresponding lease liabilities of approximately $5,000 on the consolidated balance sheet under Topic 842. Adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations. Management adopted the guidance on January 1, 2019, and elected certain practical expedients offered by the FASB, including foregoing the restatement of comparative periods upon adoption. Management also excluded short-term leases from the recognition of right-of-use asset and lease liabilities. Additionally, the Company elected the transition relief allowed by FASB in foregoing reassessment of the following: whether any existing contracts were or contained leases, the classification of existing leases, and the determination of initial direct costs for existing leases. As of September 30, 2020, the Company leases (1) 6 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases. See Note 5 for additional detail.
17
ASU 2017-04; Intangibles - Goodwill and Other (Topic 350)—The ASU simplifies the accounting for goodwill impairment. This guidance, among other things, removes step two of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in either greater or less impairment being recognized than under current guidance. The Company adopted this Update for the Company’s annual goodwill impairment tests beginning in the year ended December 31, 2019. Adoption of this ASU had no material impact on its consolidated financial statements.
ASU 2018-13, Fair Value Measurement (Topic 820)—The ASU modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose, (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and (2) the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that, disclosure regarding measurement uncertainty, is intended to communicate information about the uncertainty in measurement, as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including (1) disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted this ASU, in the first quarter of 2020. The amendments on (1) changes in unrealized gains and losses, (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and (3) the narrative description of measurement uncertainty, are being applied prospectively. All other amendments have been applied retrospectively for all periods presented. Adoption of this ASU had no material impact on its consolidated financial position or results of operations.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)—The ASU was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement), by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract, with similar costs to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance became effective for the Company beginning in the first quarter of 2020. Adoption of this ASU had no material impact on its consolidated financial statements.
ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting--The ASU provides optional and temporary relief, in the form of optional expedients and exceptions, for applying GAAP to modifications of contacts, hedging relationships and other transactions affected by reference rate (e.g. LIBOR) reforms. ASU 2020-04 is effective for the Company immediately and through December 31, 2022. The Company utilizes LIBOR, among other indexes, as a reference rate for underwriting variable rate loans. Reference rate reform has not had, nor does the Company expect it to have, a material effect on the Company’s consolidated balance sheet, operations or cash flows.
Recently Issued, But Not Yet Effective Accounting Pronouncements
ASU 2016-13; Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments--The ASU changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. In November 2019, the FASB issued ASU 2019-10, extending the effective date to fiscal years beginning after December 15, 2022, which is the Company’s fiscal year ending December 31, 2023. Earlier adoption is permitted; however, the Company does not currently plan to adopt the ASU early. Management is assessing alternative loss estimation methodologies and the Company’s data and system needs in order to evaluate the impact that adoption of this standard will have on the Company’s financial condition and results of operations. The Company anticipates recording the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ASU is effective, which will be January 1, 2023.
18
NOTE 2 – INVESTMENT SECURITIES
The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of September 30, 2020 and December 31, 2019, respectively, were as follows:
| Available for sale securities | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||
| U.S. government agency obligations | $ | 34,059 | $ | 391 | $ | 71 | $ | 34,379 | |||||||||||||||
| Obligations of states and political subdivisions | 140 | — | — | 140 | |||||||||||||||||||
| Mortgage-backed securities | 49,870 | 1,888 | — | 51,758 | |||||||||||||||||||
| Corporate debt securities | 15,211 | 277 | 124 | 15,364 | |||||||||||||||||||
| Corporate asset-based securities | 36,443 | 38 | 938 | 35,543 | |||||||||||||||||||
| Trust preferred securities | 13,938 | 69 | 283 | 13,724 | |||||||||||||||||||
| Total available for sale securities | $ | 149,661 | $ | 2,663 | $ | 1,416 | $ | 150,908 | |||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| U.S. government agency obligations | $ | 52,020 | $ | 132 | $ | 347 | $ | 51,805 | |||||||||||||||
| Obligations of states and political subdivisions | 281 | — | — | 281 | |||||||||||||||||||
| Mortgage-backed securities | 70,806 | 635 | 110 | 71,331 | |||||||||||||||||||
| Corporate debt securities | 18,776 | 66 | 117 | 18,725 | |||||||||||||||||||
| Corporate asset-based securities | 27,718 | — | 864 | 26,854 | |||||||||||||||||||
| Trust preferred securities | 11,167 | 35 | 79 | 11,123 | |||||||||||||||||||
| Total available for sale securities | $ | 180,768 | $ | 868 | $ | 1,517 | $ | 180,119 | |||||||||||||||
| Held to maturity securities | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | 300 | $ | — | $ | — | $ | 300 | |||||||||||||||
| Mortgage-backed securities | 16,627 | 306 | — | 16,933 | |||||||||||||||||||
| Total held to maturity securities | $ | 16,927 | $ | 306 | $ | — | $ | 17,233 | |||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | 300 | $ | 2 | $ | — | $ | 302 | |||||||||||||||
| Mortgage-backed securities | 2,551 | 104 | — | 2,655 | |||||||||||||||||||
| Total held to maturity securities | $ | 2,851 | $ | 106 | $ | — | $ | 2,957 | |||||||||||||||
As of September 30, 2020, the Bank has pledged U.S. Government Agency securities with a carrying value of $595 and mortgage-backed securities with a carrying value of $3,855 as collateral against specific municipal deposits. At September 30, 2020, the Bank has pledged mortgage-backed securities with a carrying value of $1,299 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of September 30, 2020, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of September 30, 2020, the Bank also has mortgage-backed securities with a carrying value of $530 pledged as collateral to the Federal Home Loan Bank of Des Moines.
19
The estimated fair value of securities at September 30, 2020 and December 31, 2019, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities may differ from contractual maturities on certain agency and municipal securities due to the call feature.
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Available for sale securities | Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||||||||
| Due in one year or less | $ | — | $ | — | $ | 141 | $ | 141 | |||||||||||||||
| Due after one year through five years | 3,850 | 4,064 | 5,900 | 5,959 | |||||||||||||||||||
| Due after five years through ten years | 39,417 | 39,461 | 43,269 | 43,180 | |||||||||||||||||||
| Due after ten years | 56,524 | 55,625 | 60,652 | 59,508 | |||||||||||||||||||
| Total securities with contractual maturities | $ | 99,791 | $ | 99,150 | $ | 109,962 | $ | 108,788 | |||||||||||||||
| Mortgage backed securities | 49,870 | 51,758 | 70,806 | 71,331 | |||||||||||||||||||
| Securities without contractual maturities | — | — | — | — | |||||||||||||||||||
| Total available for sale securities | $ | 149,661 | $ | 150,908 | $ | 180,768 | $ | 180,119 | |||||||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Held to maturity securities | Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||||||||
| Due in one year or less | $ | 300 | $ | 300 | $ | 300 | $ | 302 | |||||||||||||||
| Total securities with contractual maturities | 300 | 300 | 300 | 302 | |||||||||||||||||||
| Mortgage backed securities | 16,627 | 16,933 | 2,551 | 2,655 | |||||||||||||||||||
| Total held to maturity securities | $ | 16,927 | $ | 17,233 | $ | 2,851 | $ | 2,957 | |||||||||||||||
Securities with unrealized losses at September 30, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||||
| Available for sale securities | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||||||||||||||
| U.S. government agency obligations | $ | 9,596 | $ | 24 | $ | 5,364 | $ | 47 | $ | 14,960 | $ | 71 | ||||||||||||||||||||||||||
| Corporate debt securities | 2,009 | 17 | 1,393 | 107 | 3,402 | 124 | ||||||||||||||||||||||||||||||||
| Corporate asset-based securities | — | — | 33,603 | 938 | 33,603 | 938 | ||||||||||||||||||||||||||||||||
| Trust preferred securities | 10,963 | 283 | — | — | 10,963 | 283 | ||||||||||||||||||||||||||||||||
| Total | $ | 22,568 | $ | 324 | $ | 40,360 | $ | 1,092 | $ | 62,928 | $ | 1,416 | ||||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||||||||
| U.S. government agency obligations | $ | 14,593 | $ | 156 | $ | 10,540 | $ | 191 | $ | 25,133 | $ | 347 | ||||||||||||||||||||||||||
| Mortgage backed securities | 22,537 | 62 | 5,883 | 48 | 28,420 | 110 | ||||||||||||||||||||||||||||||||
| Corporate debt securities | 7,001 | 15 | 1,398 | 102 | 8,399 | 117 | ||||||||||||||||||||||||||||||||
| Corporate asset-based securities | 8,683 | 285 | 18,171 | 579 | 26,854 | 864 | ||||||||||||||||||||||||||||||||
| Trust preferred securities | 7,420 | 79 | — | — | 7,420 | 79 | ||||||||||||||||||||||||||||||||
| Total | $ | 60,234 | $ | 597 | $ | 35,992 | $ | 920 | $ | 96,226 | $ | 1,517 | ||||||||||||||||||||||||||
There were no held to maturity securities in a net loss position at either September 30, 2020 or December 31, 2019.
The Company evaluates AFS securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value
20
has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
As of September 30, 2020, the Company does not consider its AFS securities with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration; thus, no other-than-temporary impairment on AFS securities was recorded. There were no other-than-temporary impairments charged to earnings during the three or nine months ended September 30, 2020 or the three or nine months ended September 30, 2019.
During the three and nine months ended September 30, 2020, the Bank sold approximately $0 and $10,700 of fixed-rate mortgage-backed certificates with a realized gain of $0 and $156, respectively, which is included in net gains on investment securities in the Consolidated Statements of Operations. During the three and nine months ended September 30, 2019, the Bank sold approximately $7,950 of fixed rate securities with a realized gain of $26, which is included in net gains on investment securities in the Consolidated Statements of Operations.
NOTE 3 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
Portfolio Segments:
Commercial and agricultural real estate loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The level of owner-occupied property versus non-owner-occupied property are tracked and monitored on a regular basis. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 75%.
Commercial and industrial (“C&I”) loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Agricultural operating loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines. Operating lines are typically written for one year and secured by the crop and other farm assets or other business assets, as considered necessary. Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.
Residential mortgage loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on borrower’s documented income, credit scores, and collateral values. Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home’s appraised value less the balance owed on the existing first mortgage. Credit risk is minimized within the residential mortgage portfolio due to relatively small loan account balances spread across many individual borrowers. Management evaluates trends in past due loans and current economic factors such as the housing price index on a regular basis.
Consumer installment loans are comprised of originated indirect paper loans secured primarily by boats and recreational vehicles and other consumer loans secured primarily by automobiles and other personal assets. The Bank ceased new originations of indirect paper loans in early fiscal 2017. Consumer loan underwriting terms often depend on the collateral type, debt to income ratio and the borrower’s creditworthiness as evidenced by their credit score. In the event of a consumer installment loan default, collateral value alone may not provide an adequate source of repayment of the outstanding loan balance. This shortage is a result of the greater likelihood of damage, loss and depreciation for consumer based collateral.
21
Credit Quality/Risk Ratings:
Management utilizes a numeric risk rating system to identify and quantify the Bank’s risk of loss within its loan portfolio. Ratings are initially assigned prior to funding the loan, and may be changed at any time as circumstances warrant.
Ratings range from the highest to lowest quality based on factors that include measurements of ability to pay, collateral type and value, borrower stability and management experience. The Bank’s loan portfolio ratings are presented below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:
1 through 4 - Pass. A “Pass” loan means that the condition of the borrower and the performance of the loan is satisfactory or better.
5 - Watch. A “Watch” loan has clearly identifiable developing weaknesses that deserve additional attention from management. Weaknesses that are not corrected or mitigated, may jeopardize the ability of the borrower to repay the loan in the future.
6 - Special Mention. A “Special Mention” loan has one or more potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position in the future.
7 - Substandard. A “Substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
8 - Doubtful. A “Doubtful” loan has all the weaknesses inherent in a Substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
9 - Loss. Loans classified as “Loss” are considered uncollectible, and their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, and a partial recovery may occur in the future.
22
Below is a summary of originated and acquired loans by type and risk rating as of September 30, 2020:
| 1 to 5 | 6 | 7 | 8 | 9 | TOTAL | |||||||||||||||||||||||||||||||||
| Originated Loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial/Agricultural real estate: | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 318,915 | $ | 1,947 | $ | 1,166 | $ | — | $ | — | $ | 322,028 | ||||||||||||||||||||||||||
| Agricultural real estate | 30,807 | 454 | 1,269 | — | — | 32,530 | ||||||||||||||||||||||||||||||||
| Multi-family real estate | 100,148 | — | — | — | — | 100,148 | ||||||||||||||||||||||||||||||||
| Construction and land development | 77,514 | — | 3,478 | — | — | 80,992 | ||||||||||||||||||||||||||||||||
| C&I/Agricultural operating: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 75,338 | 802 | 3,819 | — | — | 79,959 | ||||||||||||||||||||||||||||||||
| C&I SBA PPP loans | 139,166 | — | — | — | — | 139,166 | ||||||||||||||||||||||||||||||||
| Agricultural operating | 23,040 | 28 | 1,256 | — | — | 24,324 | ||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 85,922 | 7 | 4,171 | — | — | 90,100 | ||||||||||||||||||||||||||||||||
| Purchased HELOC loans | 6,220 | — | 327 | — | — | 6,547 | ||||||||||||||||||||||||||||||||
| Consumer installment: | ||||||||||||||||||||||||||||||||||||||
| Originated indirect paper | 28,312 | — | 223 | — | — | 28,535 | ||||||||||||||||||||||||||||||||
| Other consumer | 13,135 | — | 86 | — | — | 13,221 | ||||||||||||||||||||||||||||||||
| Total originated loans | $ | 898,517 | $ | 3,238 | $ | 15,795 | $ | — | $ | — | $ | 917,550 | ||||||||||||||||||||||||||
| Acquired Loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial/Agricultural real estate: | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 168,360 | $ | 4,237 | $ | 6,048 | $ | — | $ | — | $ | 178,645 | ||||||||||||||||||||||||||
| Agricultural real estate | 33,765 | — | 6,848 | — | — | 40,613 | ||||||||||||||||||||||||||||||||
| Multi-family real estate | 9,372 | — | 148 | — | — | 9,520 | ||||||||||||||||||||||||||||||||
| Construction and land development | 8,264 | — | 82 | — | — | 8,346 | ||||||||||||||||||||||||||||||||
| C&I/Agricultural operating: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 23,572 | 59 | 782 | — | — | 24,413 | ||||||||||||||||||||||||||||||||
| Agricultural operating | 8,688 | — | 946 | — | — | 9,634 | ||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 49,243 | 243 | 2,268 | — | — | 51,754 | ||||||||||||||||||||||||||||||||
| Consumer installment: | ||||||||||||||||||||||||||||||||||||||
| Other consumer | 1,404 | — | 5 | — | — | 1,409 | ||||||||||||||||||||||||||||||||
| Total acquired loans | $ | 302,668 | $ | 4,539 | $ | 17,127 | $ | — | $ | — | $ | 324,334 | ||||||||||||||||||||||||||
| Total Loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial/Agricultural real estate: | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 487,275 | $ | 6,184 | $ | 7,214 | $ | — | $ | — | $ | 500,673 | ||||||||||||||||||||||||||
| Agricultural real estate | 64,572 | 454 | 8,117 | — | — | 73,143 | ||||||||||||||||||||||||||||||||
| Multi-family real estate | 109,520 | — | 148 | — | — | 109,668 | ||||||||||||||||||||||||||||||||
| Construction and land development | 85,778 | — | 3,560 | — | — | 89,338 | ||||||||||||||||||||||||||||||||
| Commercial/Agricultural non-real estate: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 98,910 | 861 | 4,601 | — | — | 104,372 | ||||||||||||||||||||||||||||||||
| C&I SBA PPP loans | 139,166 | — | — | — | — | 139,166 | ||||||||||||||||||||||||||||||||
| Agricultural operating | 31,728 | 28 | 2,202 | — | — | 33,958 | ||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 135,165 | 250 | 6,439 | — | — | 141,854 | ||||||||||||||||||||||||||||||||
| Purchased HELOC loans | 6,220 | — | 327 | — | — | 6,547 | ||||||||||||||||||||||||||||||||
| Consumer installment: | ||||||||||||||||||||||||||||||||||||||
| Originated indirect paper | 28,312 | — | 223 | — | — | 28,535 | ||||||||||||||||||||||||||||||||
| Other Consumer | 14,539 | — | 91 | — | — | 14,630 | ||||||||||||||||||||||||||||||||
| Gross loans | $ | 1,201,185 | $ | 7,777 | $ | 32,922 | $ | — | $ | — | $ | 1,241,884 | ||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||
| Unearned net deferred fees and costs and loans in process | (5,033) | |||||||||||||||||||||||||||||||||||||
| Unamortized discount on acquired loans | (6,712) | |||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (14,836) | |||||||||||||||||||||||||||||||||||||
| Loans receivable, net | $ | 1,215,303 | ||||||||||||||||||||||||||||||||||||
23
Below is a summary of originated loans by type and risk rating as of December 31, 2019:
| 1 to 5 | 6 | 7 | 8 | 9 | TOTAL | |||||||||||||||||||||||||||||||||
| Originated Loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial/Agricultural real estate: | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 301,381 | $ | 266 | $ | 899 | $ | — | $ | — | $ | 302,546 | ||||||||||||||||||||||||||
| Agricultural real estate | 31,129 | 829 | 2,068 | — | — | 34,026 | ||||||||||||||||||||||||||||||||
| Multi-family real estate | 71,877 | — | — | — | — | 71,877 | ||||||||||||||||||||||||||||||||
| Construction and land development | 67,989 | — | 3,478 | — | — | 71,467 | ||||||||||||||||||||||||||||||||
| C&I/Agricultural operating: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 85,248 | 1,023 | 3,459 | — | — | 89,730 | ||||||||||||||||||||||||||||||||
| Agricultural operating | 19,545 | 402 | 770 | — | — | 20,717 | ||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 104,428 | — | 4,191 | — | — | 108,619 | ||||||||||||||||||||||||||||||||
| Purchased HELOC loans | 8,407 | — | — | — | — | 8,407 | ||||||||||||||||||||||||||||||||
| Consumer installment: | — | |||||||||||||||||||||||||||||||||||||
| Originated indirect paper | 39,339 | — | 246 | — | — | 39,585 | ||||||||||||||||||||||||||||||||
| Other Consumer | 15,425 | — | 121 | — | — | 15,546 | ||||||||||||||||||||||||||||||||
| Total originated loans | $ | 744,768 | $ | 2,520 | $ | 15,232 | $ | — | $ | — | $ | 762,520 | ||||||||||||||||||||||||||
| Acquired Loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial/Agricultural real estate: | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 196,692 | $ | 6,084 | $ | 9,137 | $ | — | $ | — | $ | 211,913 | ||||||||||||||||||||||||||
| Agricultural real estate | 42,381 | 534 | 8,422 | — | — | 51,337 | ||||||||||||||||||||||||||||||||
| Multi-family real estate | 13,533 | — | 1,598 | — | — | 15,131 | ||||||||||||||||||||||||||||||||
| Construction and land development | 14,181 | — | 762 | — | — | 14,943 | ||||||||||||||||||||||||||||||||
| C&I/Agricultural operating: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 41,587 | 932 | 1,485 | — | — | 44,004 | ||||||||||||||||||||||||||||||||
| Agricultural operating | 15,621 | 350 | 1,092 | — | — | 17,063 | ||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 65,125 | 436 | 2,152 | — | — | 67,713 | ||||||||||||||||||||||||||||||||
| Consumer installment: | ||||||||||||||||||||||||||||||||||||||
| Other Consumer | 2,628 | — | 12 | — | — | 2,640 | ||||||||||||||||||||||||||||||||
| Total acquired loans | $ | 391,748 | $ | 8,336 | $ | 24,660 | $ | — | $ | — | $ | 424,744 | ||||||||||||||||||||||||||
| Total Loans: | ||||||||||||||||||||||||||||||||||||||
| Commercial/Agricultural real estate: | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 498,073 | $ | 6,350 | $ | 10,036 | $ | — | $ | — | 514,459 | |||||||||||||||||||||||||||
| Agricultural real estate | 73,510 | 1,363 | 10,490 | — | — | 85,363 | ||||||||||||||||||||||||||||||||
| Multi-family real estate | 85,410 | — | 1,598 | — | — | 87,008 | ||||||||||||||||||||||||||||||||
| Construction and land development | 82,170 | — | 4,240 | — | — | 86,410 | ||||||||||||||||||||||||||||||||
| C&I/Agricultural operating: | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 126,835 | 1,955 | 4,944 | — | — | 133,734 | ||||||||||||||||||||||||||||||||
| Agricultural operating | 35,166 | 752 | 1,862 | — | — | 37,780 | ||||||||||||||||||||||||||||||||
| Residential mortgage: | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 169,553 | 436 | 6,343 | — | — | 176,332 | ||||||||||||||||||||||||||||||||
| Purchased HELOC loans | 8,407 | — | — | — | — | 8,407 | ||||||||||||||||||||||||||||||||
| Consumer installment: | ||||||||||||||||||||||||||||||||||||||
| Originated indirect paper | 39,339 | — | 246 | — | — | 39,585 | ||||||||||||||||||||||||||||||||
| Other Consumer | 18,053 | — | 133 | — | — | 18,186 | ||||||||||||||||||||||||||||||||
| Gross loans | $ | 1,136,516 | $ | 10,856 | $ | 39,892 | $ | — | $ | — | $ | 1,187,264 | ||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||
| Unearned net deferred fees and costs and loans in process | (393) | |||||||||||||||||||||||||||||||||||||
| Unamortized discount on acquired loans | (9,491) | |||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (10,320) | |||||||||||||||||||||||||||||||||||||
| Loans receivable, net | $ | 1,167,060 | ||||||||||||||||||||||||||||||||||||
24
Allowance for Loan Losses - The ALL represents management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change.
There are many factors affecting the ALL; some are quantitative, while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which result in probable credit losses), includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.
As an integral part of their examination process, various regulatory agencies also review the Bank’s ALL. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of our management based on information available to the regulators at the time of their examinations.
Changes in the ALL by loan type for the periods presented below were as follows:
| Commercial/Agriculture Real Estate | C&I/Agricultural operating | Residential Mortgage | Consumer Installment | Unallocated | Total | ||||||||||||||||||||||||||||||
| Three months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses: | |||||||||||||||||||||||||||||||||||
| Beginning balance, July 1, 2020 | $ | 8,297 | $ | 1,778 | $ | 980 | $ | 480 | $ | 574 | $ | 12,109 | |||||||||||||||||||||||
| Charge-offs | — | (103) | (4) | (10) | — | (117) | |||||||||||||||||||||||||||||
| Recoveries | 74 | — | 2 | 18 | — | 94 | |||||||||||||||||||||||||||||
| Provision | 430 | 188 | (15) | 64 | 56 | 723 | |||||||||||||||||||||||||||||
| Total Allowance on originated loans | 8,801 | 1,863 | 963 | 552 | 630 | 12,809 | |||||||||||||||||||||||||||||
| Purchased credit impaired loans | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Other acquired loans: | |||||||||||||||||||||||||||||||||||
| Beginning balance, July 1, 2020 | 746 | 334 | 112 | 72 | — | 1,264 | |||||||||||||||||||||||||||||
| Charge-offs | — | — | (47) | — | — | (47) | |||||||||||||||||||||||||||||
| Recoveries | 1 | 30 | — | 2 | — | 33 | |||||||||||||||||||||||||||||
| Provision | 623 | (58) | 199 | 13 | — | 777 | |||||||||||||||||||||||||||||
| Total Allowance on other acquired loans | 1,370 | 306 | 264 | 87 | — | 2,027 | |||||||||||||||||||||||||||||
| Total Allowance on acquired loans | 1,370 | 306 | 264 | 87 | — | 2,027 | |||||||||||||||||||||||||||||
| Ending balance, September 30, 2020 | $ | 10,171 | $ | 2,169 | $ | 1,227 | $ | 639 | $ | 630 | $ | 14,836 | |||||||||||||||||||||||
25
| Commercial/Agriculture Real Estate | C&I/Agricultural operating | Residential Mortgage | Consumer Installment | Unallocated | Total | ||||||||||||||||||||||||||||||
| Nine months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses: | |||||||||||||||||||||||||||||||||||
| Beginning balance, January 1, 2020 | $ | 6,205 | $ | 1,643 | $ | 879 | $ | 467 | $ | 357 | $ | 9,551 | |||||||||||||||||||||||
| Charge-offs | — | (632) | (4) | (124) | — | (760) | |||||||||||||||||||||||||||||
| Recoveries | 74 | — | 7 | 55 | — | 136 | |||||||||||||||||||||||||||||
| Provision | 2,522 | 852 | 81 | 154 | 273 | 3,882 | |||||||||||||||||||||||||||||
| Total Allowance on originated loans | 8,801 | 1,863 | 963 | 552 | 630 | 12,809 | |||||||||||||||||||||||||||||
| Purchased credit impaired loans | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Other acquired loans: | |||||||||||||||||||||||||||||||||||
| Beginning balance, January 1, 2020 | 526 | 27 | 163 | 53 | — | 769 | |||||||||||||||||||||||||||||
| Charge-offs | — | (159) | (74) | (2) | — | (235) | |||||||||||||||||||||||||||||
| Recoveries | 77 | 30 | 14 | 4 | — | 125 | |||||||||||||||||||||||||||||
| Provision | 767 | 408 | 161 | 32 | — | 1,368 | |||||||||||||||||||||||||||||
| Total Allowance on other acquired loans | 1,370 | 306 | 264 | 87 | — | 2,027 | |||||||||||||||||||||||||||||
| Total Allowance on acquired loans | 1,370 | 306 | 264 | 87 | — | 2,027 | |||||||||||||||||||||||||||||
| Ending balance, September 30, 2020 | $ | 10,171 | $ | 2,169 | $ | 1,227 | $ | 639 | $ | 630 | $ | 14,836 | |||||||||||||||||||||||
| Allowance for Loan Losses at September 30, 2020: | |||||||||||||||||||||||||||||||||||
| Amount of allowance for loan losses arising from loans individually evaluated for impairment | $ | 772 | $ | 159 | $ | 249 | $ | 1 | $ | — | $ | 1,181 | |||||||||||||||||||||||
| Amount of allowance for loan losses arising from loans collectively evaluated for impairment | $ | 9,399 | $ | 2,010 | $ | 978 | $ | 638 | $ | 630 | $ | 13,655 | |||||||||||||||||||||||
| Loans Receivable as of September 30, 2020: | — | ||||||||||||||||||||||||||||||||||
| Ending balance of originated loans | $ | 535,698 | $ | 243,449 | $ | 96,647 | $ | 41,756 | $ | — | $ | 917,550 | |||||||||||||||||||||||
| Ending balance of purchased credit-impaired loans | 21,453 | 2,077 | 1,553 | — | — | 25,083 | |||||||||||||||||||||||||||||
| Ending balance of other acquired loans | 215,671 | 31,970 | 50,201 | 1,409 | — | 299,251 | |||||||||||||||||||||||||||||
| Ending balance of loans | $ | 772,822 | $ | 277,496 | $ | 148,401 | $ | 43,165 | $ | — | $ | 1,241,884 | |||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 13,190 | $ | 6,275 | $ | 8,436 | $ | 367 | $ | — | $ | 28,268 | |||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 759,632 | $ | 271,221 | $ | 139,965 | $ | 42,798 | $ | — | $ | 1,213,616 | |||||||||||||||||||||||
26
| Commercial/Agriculture Real Estate | C&I/Agricultural operating | Residential Mortgage | Consumer Installment | Unallocated | Total | ||||||||||||||||||||||||||||||
| Three months ended September 30, 2019 | |||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses: | |||||||||||||||||||||||||||||||||||
| Beginning balance, July 1, 2019 | $ | 5,010 | $ | 1,470 | $ | 977 | $ | 528 | $ | 299 | $ | 8,284 | |||||||||||||||||||||||
| Charge-offs | — | — | (89) | (36) | — | (125) | |||||||||||||||||||||||||||||
| Recoveries | — | — | — | 17 | — | 17 | |||||||||||||||||||||||||||||
| Provision | 281 | 130 | 117 | (12) | 2 | 518 | |||||||||||||||||||||||||||||
| Total Allowance on originated loans | 5,291 | 1,600 | 1,005 | 497 | 301 | 8,694 | |||||||||||||||||||||||||||||
| Purchased credit impaired loans | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Other acquired loans: | |||||||||||||||||||||||||||||||||||
| Beginning balance, July 1, 2019 | 181 | 85 | 153 | 56 | — | 475 | |||||||||||||||||||||||||||||
| Charge-offs | — | — | (45) | (9) | — | (54) | |||||||||||||||||||||||||||||
| Recoveries | — | — | 1 | 4 | — | 5 | |||||||||||||||||||||||||||||
| Provision | (10) | 2 | 61 | 4 | — | 57 | |||||||||||||||||||||||||||||
| Total Allowance on other acquired loans | 171 | 87 | 170 | 55 | — | 483 | |||||||||||||||||||||||||||||
| Total Allowance on acquired loans | 171 | 87 | 170 | 55 | — | 483 | |||||||||||||||||||||||||||||
| Ending balance, September 30, 2019 | $ | 5,462 | $ | 1,687 | $ | 1,175 | $ | 552 | $ | 301 | $ | 9,177 | |||||||||||||||||||||||
27
| Commercial/Agriculture Real Estate | C&I/Agricultural operating | Residential Mortgage | Consumer Installment | Unallocated | Total | ||||||||||||||||||||||||||||||
| Nine months ended September 30, 2019 | |||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses: | |||||||||||||||||||||||||||||||||||
| Beginning balance, January 1, 2019 | $ | 4,019 | $ | 1,258 | $ | 1,048 | $ | 641 | $ | 214 | $ | 7,180 | |||||||||||||||||||||||
| Charge-offs | (225) | — | (119) | (142) | — | (486) | |||||||||||||||||||||||||||||
| Recoveries | — | — | — | 53 | — | 53 | |||||||||||||||||||||||||||||
| Provision | 1,497 | 342 | 76 | (55) | 87 | 1,947 | |||||||||||||||||||||||||||||
| Total Allowance on originated loans | $ | 5,291 | $ | 1,600 | $ | 1,005 | $ | 497 | $ | 301 | $ | 8,694 | |||||||||||||||||||||||
| Purchased credit impaired loans | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Other acquired loans | |||||||||||||||||||||||||||||||||||
| Beginning balance, January 1, 2019 | 183 | 32 | 205 | 65 | (61) | 424 | |||||||||||||||||||||||||||||
| Charge-offs | — | — | (105) | (29) | — | (134) | |||||||||||||||||||||||||||||
| Recoveries | 3 | — | 2 | 10 | — | 15 | |||||||||||||||||||||||||||||
| Provision | (15) | 55 | 68 | 9 | 61 | 178 | |||||||||||||||||||||||||||||
| Total Allowance on other acquired loans | 171 | 87 | 170 | 55 | — | 483 | |||||||||||||||||||||||||||||
| Total Allowance on acquired loans | 171 | 87 | 170 | 55 | — | 483 | |||||||||||||||||||||||||||||
| Ending balance, September 30, 2019 | $ | 5,462 | $ | 1,687 | $ | 1,175 | $ | 552 | $ | 301 | $ | 9,177 | |||||||||||||||||||||||
| Allowance for Loan Losses at September 30, 2019: | |||||||||||||||||||||||||||||||||||
| Amount of allowance for loan losses arising from loans individually evaluated for impairment | $ | 205 | $ | 252 | $ | 191 | $ | 15 | $ | — | $ | 663 | |||||||||||||||||||||||
| Amount of allowance for loan losses arising from loans collectively evaluated for impairment | $ | 5,257 | $ | 1,435 | $ | 984 | $ | 537 | $ | 301 | $ | 8,514 | |||||||||||||||||||||||
| Loans Receivable as of September 30, 2019: | |||||||||||||||||||||||||||||||||||
| Ending balance of originated loans | $ | 401,211 | $ | 102,998 | $ | 124,627 | $ | 58,612 | $ | — | $ | 687,448 | |||||||||||||||||||||||
| Ending balance of purchased credit-impaired loans | 33,840 | 5,320 | 2,273 | — | — | 41,433 | |||||||||||||||||||||||||||||
| Ending balance of other acquired loans | 272,744 | 58,741 | 71,290 | 3,052 | — | 405,827 | |||||||||||||||||||||||||||||
| Ending balance of loans | $ | 707,795 | $ | 167,059 | $ | 198,190 | $ | 61,664 | $ | — | $ | 1,134,708 | |||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 16,458 | $ | 7,215 | $ | 8,626 | $ | 419 | $ | — | $ | 32,718 | |||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 691,337 | $ | 159,844 | $ | 189,564 | $ | 61,245 | $ | — | $ | 1,101,990 | |||||||||||||||||||||||
28
Loans receivable by loan type as of the end of the periods shown below were as follows:
| Commercial/Agriculture Real Estate Loans | C&I/Agricultural Operating | Residential Mortgage | Consumer Installment | Totals | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing TDR loans | $ | 5,480 | $ | 1,730 | $ | 3,868 | $ | 366 | $ | 3,178 | $ | 3,206 | $ | 53 | $ | 68 | $ | 12,579 | $ | 5,370 | |||||||||||||||||||||||||||||||||||||||
| Performing loans other | 759,328 | 758,237 | 271,124 | 167,596 | 141,755 | 178,415 | 42,994 | 57,486 | 1,215,201 | 1,161,734 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total performing loans | 764,808 | 759,967 | 274,992 | 167,962 | 144,933 | 181,621 | 43,047 | 57,554 | 1,227,780 | 1,167,104 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Nonperforming loans (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nonperforming TDR loans | 5,037 | 4,868 | 1,490 | 1,973 | 672 | 383 | — | — | 7,199 | 7,224 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Nonperforming loans other | 2,977 | 8,405 | 1,014 | 1,579 | 2,796 | 2,735 | 118 | 217 | 6,905 | 12,936 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total nonperforming loans | 8,014 | 13,273 | 2,504 | 3,552 | 3,468 | 3,118 | 118 | 217 | 14,104 | 20,160 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | 772,822 | $ | 773,240 | $ | 277,496 | $ | 171,514 | $ | 148,401 | $ | 184,739 | $ | 43,165 | $ | 57,771 | $ | 1,241,884 | $ | 1,187,264 | |||||||||||||||||||||||||||||||||||||||
(1)Nonperforming loans are either 90+ days past due or nonaccrual.
As of September 30, 2020, the Company had $260.8 million in unused commitments, compared to $246.7 million in unused commitments as of December 31, 2019.
29
An aging analysis of the Company’s commercial/agricultural real estate, C&I, agricultural operating, residential mortgage, consumer installment and purchased third party loans as of September 30, 2020 and December 31, 2019, respectively, was as follows:
| 30-59 Days Past Due and Accruing | 60-89 Days Past Due and Accruing | Greater Than 89 Days Past Due and Accruing | Total Past Due and Accruing | Nonaccrual Loans | Total Past Due Accruing and Nonaccrual Loans | Current | Total Loans | ||||||||||||||||||||||||||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial/Agricultural real estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 247 | $ | 99 | $ | — | $ | 346 | $ | 2,614 | $ | 2,960 | $ | 497,713 | $ | 500,673 | |||||||||||||||||||||||||||||||
| Agricultural real estate | 179 | — | — | 179 | 5,252 | 5,431 | 67,712 | 73,143 | |||||||||||||||||||||||||||||||||||||||
| Multi-family real estate | — | — | — | — | 148 | 148 | 109,520 | 109,668 | |||||||||||||||||||||||||||||||||||||||
| Construction and land development | 224 | 379 | — | 603 | — | 603 | 88,735 | 89,338 | |||||||||||||||||||||||||||||||||||||||
| C&I/Agricultural operating: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 163 | — | — | 163 | 853 | 1,016 | 103,355 | 104,371 | |||||||||||||||||||||||||||||||||||||||
| C&I SBA PPP loans | — | — | — | — | — | — | 139,166 | 139,166 | |||||||||||||||||||||||||||||||||||||||
| Agricultural operating | 451 | 600 | — | 1,051 | 1,651 | 2,702 | 31,256 | 33,958 | |||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | |||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 2,256 | 960 | 838 | 4,054 | 2,302 | 6,356 | 135,498 | 141,854 | |||||||||||||||||||||||||||||||||||||||
| Purchased HELOC loans | — | 67 | 94 | 161 | 234 | 395 | 6,152 | 6,547 | |||||||||||||||||||||||||||||||||||||||
| Consumer installment: | |||||||||||||||||||||||||||||||||||||||||||||||
| Originated indirect paper | 111 | 41 | 17 | 169 | 74 | 243 | 28,293 | 28,536 | |||||||||||||||||||||||||||||||||||||||
| Other Consumer | 63 | 15 | 1 | 79 | 26 | 105 | 14,525 | 14,630 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 3,694 | $ | 2,161 | $ | 950 | $ | 6,805 | $ | 13,154 | $ | 19,959 | $ | 1,221,925 | $ | 1,241,884 | |||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial/Agricultural real estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 2,804 | $ | 847 | $ | — | $ | 3,651 | $ | 4,214 | $ | 7,865 | $ | 506,594 | $ | 514,459 | |||||||||||||||||||||||||||||||
| Agricultural real estate | 509 | — | — | 509 | 7,568 | 8,077 | 77,286 | 85,363 | |||||||||||||||||||||||||||||||||||||||
| Multi-family real estate | — | — | — | — | 1,449 | 1,449 | 85,559 | 87,008 | |||||||||||||||||||||||||||||||||||||||
| Construction and land development | 436 | — | — | 436 | 42 | 478 | 85,932 | 86,410 | |||||||||||||||||||||||||||||||||||||||
| C&I/Agricultural operating: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 1,024 | — | — | 1,024 | 1,850 | 2,874 | 130,860 | 133,734 | |||||||||||||||||||||||||||||||||||||||
| Agricultural operating | 73 | 49 | — | 122 | 1,702 | 1,824 | 35,956 | 37,780 | |||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | |||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 4,929 | 1,597 | 649 | 7,175 | 2,063 | 9,238 | 167,094 | 176,332 | |||||||||||||||||||||||||||||||||||||||
| Purchased HELOC loans | 293 | 378 | 407 | 1,078 | — | 1,078 | 7,329 | 8,407 | |||||||||||||||||||||||||||||||||||||||
| Consumer installment: | |||||||||||||||||||||||||||||||||||||||||||||||
| Originated indirect paper | 168 | 52 | 20 | 240 | 137 | 377 | 39,208 | 39,585 | |||||||||||||||||||||||||||||||||||||||
| Other Consumer | 204 | 43 | 28 | 275 | 31 | 306 | 17,880 | 18,186 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 10,440 | $ | 2,966 | $ | 1,104 | $ | 14,510 | $ | 19,056 | $ | 33,566 | $ | 1,153,698 | $ | 1,187,264 | |||||||||||||||||||||||||||||||
30
At September 30, 2020, the Company has identified impaired loans of $51,689, consisting of $19,778 TDR loans, the carrying amount of purchased credit impaired loans of $23,422 and $8,489 of substandard non-TDR loans. The $51,689 total of impaired loans includes $12,579 of performing TDR loans. At December 31, 2019, the Company has identified impaired loans of $63,196, consisting of $12,594 TDR loans, the carrying amount of purchased credit impaired loans of $31,978 and $18,624 of substandard non-TDR loans. The $63,196 total of impaired loans includes $5,370 of performing TDR loans. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Performing TDRs consist of loans that have been modified and are performing in accordance with the modified terms for a sufficient length of time, generally six months, or loans that were modified on a proactive basis.
A summary of the Company’s impaired loans as of September 30, 2020, December 31, 2019 and September 30, 2019 was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||
| With No Related Allowance Recorded: | |||||||||||||||||||||||||||||||||||||||||
| Commercial/agriculture real estate | $ | 30,419 | $ | 30,419 | $ | — | $ | 30,344 | $ | 454 | $ | 35,467 | $ | 1,374 | |||||||||||||||||||||||||||
| C&I/Agricultural operating | 6,860 | 6,860 | — | 7,070 | 35 | 8,169 | 188 | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 8,715 | 8,715 | — | 8,668 | 107 | 8,705 | 356 | ||||||||||||||||||||||||||||||||||
| Consumer installment | 363 | 363 | — | 363 | 6 | 371 | 23 | ||||||||||||||||||||||||||||||||||
| Total | $ | 46,357 | $ | 46,357 | $ | — | $ | 46,445 | $ | 602 | $ | 52,712 | $ | 1,941 | |||||||||||||||||||||||||||
| With An Allowance Recorded: | |||||||||||||||||||||||||||||||||||||||||
| Commercial/agriculture real estate | $ | 3,177 | $ | 3,177 | $ | 772 | $ | 3,597 | $ | 48 | $ | 2,660 | $ | 73 | |||||||||||||||||||||||||||
| C&I/Agricultural operating | 1,034 | 1,034 | 159 | 669 | — | 762 | 12 | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 1,118 | 1,118 | 249 | 970 | 7 | 1,275 | 36 | ||||||||||||||||||||||||||||||||||
| Consumer installment | 3 | 3 | 1 | 9 | — | 35 | — | ||||||||||||||||||||||||||||||||||
| Total | $ | 5,332 | $ | 5,332 | $ | 1,181 | $ | 5,245 | $ | 55 | $ | 4,732 | $ | 121 | |||||||||||||||||||||||||||
| September 30, 2020 Totals: | |||||||||||||||||||||||||||||||||||||||||
| Commercial/agriculture real estate | $ | 33,596 | $ | 33,596 | $ | 772 | $ | 33,941 | $ | 502 | $ | 38,127 | $ | 1,447 | |||||||||||||||||||||||||||
| C&I/Agricultural operating | 7,894 | 7,894 | 159 | 7,739 | 35 | 8,931 | 200 | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 9,833 | 9,833 | 249 | 9,638 | 114 | 9,980 | 392 | ||||||||||||||||||||||||||||||||||
| Consumer installment | 366 | 366 | 1 | 372 | 6 | 406 | 23 | ||||||||||||||||||||||||||||||||||
| Total | $ | 51,689 | $ | 51,689 | $ | 1,181 | $ | 51,690 | $ | 657 | $ | 57,444 | $ | 2,062 | |||||||||||||||||||||||||||
31
| Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||
| December 31, 2019 | |||||||||||||||||
| With No Related Allowance Recorded: | |||||||||||||||||
| Commercial/agriculture real estate | $ | 40,514 | $ | 40,514 | $ | — | |||||||||||
| C&I/Agricultural operating | 9,477 | 9,477 | — | ||||||||||||||
| Residential mortgage | 8,695 | 8,695 | — | ||||||||||||||
| Consumer installment | 379 | 379 | — | ||||||||||||||
| Total | $ | 59,065 | $ | 59,065 | $ | — | |||||||||||
| With An Allowance Recorded: | |||||||||||||||||
| Commercial/agriculture real estate | $ | 2,143 | $ | 2,143 | $ | 495 | |||||||||||
| C&I/Agricultural operating | 490 | 490 | 312 | ||||||||||||||
| Residential mortgage | 1,431 | 1,431 | 136 | ||||||||||||||
| Consumer installment | 67 | 67 | 13 | ||||||||||||||
| Total | $ | 4,131 | $ | 4,131 | $ | 956 | |||||||||||
| December 31, 2019 Totals | |||||||||||||||||
| Commercial/agriculture real estate | $ | 42,657 | $ | 42,657 | $ | 495 | |||||||||||
| C&I/Agricultural operating | 9,967 | 9,967 | 312 | ||||||||||||||
| Residential mortgage | 10,126 | 10,126 | 136 | ||||||||||||||
| Consumer installment | 446 | 446 | 13 | ||||||||||||||
| Total | $ | 63,196 | $ | 63,196 | $ | 956 | |||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||||||||||||||||
| September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||
| With No Related Allowance Recorded: | |||||||||||||||||||||||||||||||||||||||||
| Commercial/agriculture real estate | $ | 43,907 | $ | 43,907 | $ | — | $ | 36,724 | $ | 721 | $ | 36,379 | $ | 2,212 | |||||||||||||||||||||||||||
| C&I/Agricultural operating | 10,298 | 10,298 | — | 9,417 | 166 | 8,599 | 543 | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 9,016 | 9,016 | — | 8,593 | 141 | 8,945 | 370 | ||||||||||||||||||||||||||||||||||
| Consumer installment | 358 | 358 | — | 300 | 7 | 292 | 24 | ||||||||||||||||||||||||||||||||||
| Total | $ | 63,579 | $ | 63,579 | $ | — | $ | 55,034 | $ | 1,035 | $ | 54,215 | $ | 3,149 | |||||||||||||||||||||||||||
| With An Allowance Recorded: | |||||||||||||||||||||||||||||||||||||||||
| Commercial/agriculture real estate | $ | 1,634 | $ | 1,634 | $ | 205 | $ | 1,384 | $ | — | $ | 1,307 | $ | — | |||||||||||||||||||||||||||
| C&I/Agricultural operating | 541 | 541 | 252 | 576 | — | 284 | 11 | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 1,598 | 1,598 | 191 | 1,340 | 24 | 1,465 | 62 | ||||||||||||||||||||||||||||||||||
| Consumer installment | 62 | 62 | 15 | 85 | — | 104 | 2 | ||||||||||||||||||||||||||||||||||
| Total | $ | 3,835 | $ | 3,835 | $ | 663 | $ | 3,385 | $ | 24 | $ | 3,160 | $ | 75 | |||||||||||||||||||||||||||
| September 30, 2019 Totals: | |||||||||||||||||||||||||||||||||||||||||
| Commercial/agriculture real estate | $ | 45,541 | $ | 45,541 | $ | 205 | $ | 38,108 | $ | 721 | $ | 37,686 | $ | 2,212 | |||||||||||||||||||||||||||
| C&I/Agricultural operating | 10,839 | 10,839 | 252 | 9,993 | 166 | 8,883 | 554 | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 10,614 | 10,614 | 191 | 9,933 | 165 | 10,410 | 432 | ||||||||||||||||||||||||||||||||||
| Consumer installment | 420 | 420 | 15 | 385 | 7 | 396 | 26 | ||||||||||||||||||||||||||||||||||
| Total | $ | 67,414 | $ | 67,414 | $ | 663 | $ | 58,419 | $ | 1,059 | $ | 57,375 | $ | 3,224 | |||||||||||||||||||||||||||
32
Troubled Debt Restructuring – A TDR includes a loan modification where a borrower is experiencing financial difficulty, and the Bank grants a concession to that borrower that the Bank would not otherwise consider, except for the borrower’s financial difficulties. Concessions may include: extension of the loan’s term, renewals of existing balloon loans, reductions in interest rates and consolidating existing Bank loans at modified terms. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status. There were three delinquent accruing TDRs greater than 60 days past due with a recorded investment of $310 at September 30, 2020, compared to two such loans with a recorded investment of $101 at December 31, 2019.
Following is a summary of TDR loans by accrual status as of September 30, 2020 and December 31, 2019.
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Troubled debt restructure loans: | ||||||||||||||
| Accrual status | $ | 12,579 | $ | 5,396 | ||||||||||
| Non-accrual status | 7,199 | 7,198 | ||||||||||||
| Total | $ | 19,778 | $ | 12,594 | ||||||||||
There was one loan commitment meeting our TDR criteria as of September 30, 2020 totaling $17 and no loan commitments meeting our TDR criteria as of December 31, 2019. There were unused lines of credit totaling $85 and $12 meeting our TDR criteria as of September 30, 2020 and December 31, 2019, respectively.
The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the three and nine months ended September 30, 2020 and September 30, 2019:
| Number of Contracts | Maturity Extension | Modified Payment | Modified Under- writing | Other | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Specific Reserve | |||||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| TDRs: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial/agriculture real estate | 3 | $ | 3,550 | $ | — | $ | 276 | $ | — | $ | 3,826 | $ | 3,826 | $ | — | |||||||||||||||||||||||||||||||||||
| C&I/Agricultural operating | 2 | 3,000 | — | — | — | 3,000 | 3,000 | — | ||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 8 | 59 | 500 | 32 | — | 591 | 591 | — | ||||||||||||||||||||||||||||||||||||||||||
| Consumer installment | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Totals | 13 | $ | 6,609 | $ | 500 | $ | 308 | $ | — | $ | 7,417 | $ | 7,417 | $ | — | |||||||||||||||||||||||||||||||||||
| Number of Contracts | Maturity Extension | Modified Payment | Modified Under- writing | Other | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Specific Reserve | |||||||||||||||||||||||||||||||||||||||||||
| Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| TDRs: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial/agriculture real estate | 12 | $ | 4,442 | $ | 198 | $ | 293 | $ | — | $ | 4,933 | $ | 4,933 | $ | — | |||||||||||||||||||||||||||||||||||
| C&I/Agricultural operating | 5 | 3,295 | 78 | — | — | 3,373 | 3,373 | — | ||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 13 | 148 | 858 | 117 | — | 1,123 | 1,123 | — | ||||||||||||||||||||||||||||||||||||||||||
| Consumer installment | 2 | 3 | — | 4 | — | 7 | 7 | — | ||||||||||||||||||||||||||||||||||||||||||
| Totals | 32 | $ | 7,888 | $ | 1,134 | $ | 414 | $ | — | $ | 9,436 | $ | 9,436 | $ | — | |||||||||||||||||||||||||||||||||||
33
| Number of Contracts | Maturity Extension | Modified Payment | Modified Under- writing | Other | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Specific Reserve | |||||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| TDRs: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial/agriculture real estate | 7 | $ | 1,987 | $ | — | $ | 25 | $ | — | $ | 2,012 | $ | 2,012 | $ | — | |||||||||||||||||||||||||||||||||||
| C&I/Agricultural operating | 1 | — | — | 60 | — | 60 | 60 | — | ||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 2 | 106 | — | — | — | 106 | 106 | — | ||||||||||||||||||||||||||||||||||||||||||
| Consumer installment | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Totals | 10 | $ | 2,093 | $ | — | $ | 85 | $ | — | $ | 2,178 | $ | 2,178 | $ | — | |||||||||||||||||||||||||||||||||||
| Number of Contracts | Maturity Extension | Modified Payment | Modified Under- writing | Other | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Specific Reserve | |||||||||||||||||||||||||||||||||||||||||||
| Nine months ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| TDRs: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial/agriculture real estate | 14 | $ | 2,005 | $ | 78 | $ | 1,215 | $ | — | $ | 3,298 | $ | 3,298 | $ | — | |||||||||||||||||||||||||||||||||||
| C&I/Agricultural operating | 7 | 165 | 364 | 469 | — | 998 | 998 | — | ||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 9 | 431 | — | 171 | — | 602 | 602 | — | ||||||||||||||||||||||||||||||||||||||||||
| Consumer installment | 1 | 2 | — | — | — | 2 | 2 | — | ||||||||||||||||||||||||||||||||||||||||||
| Totals | 31 | $ | 2,603 | $ | 442 | $ | 1,855 | $ | — | $ | 4,900 | $ | 4,900 | $ | — | |||||||||||||||||||||||||||||||||||
A summary of loans by loan segment modified in a troubled debt restructuring as of September 30, 2020 and September 30, 2019, was as follows:
| September 30, 2020 | September 30, 2019 | |||||||||||||||||||||||||
| Number of Modifications | Recorded Investment | Number of Modifications | Recorded Investment | |||||||||||||||||||||||
| Troubled debt restructurings: | ||||||||||||||||||||||||||
| Commercial/agriculture real estate | 34 | $ | 10,517 | 27 | $ | 5,917 | ||||||||||||||||||||
| C&I/Agricultural operating | 17 | 5,358 | 16 | 2,366 | ||||||||||||||||||||||
| Residential mortgage | 50 | 3,850 | 42 | 3,438 | ||||||||||||||||||||||
| Consumer installment | 7 | 53 | 8 | 74 | ||||||||||||||||||||||
| Total troubled debt restructurings | 108 | $ | 19,778 | 93 | $ | 11,795 | ||||||||||||||||||||
34
The following table provides information related to restructured loans that were considered in default as of September 30, 2020 and September 30, 2019:
| September 30, 2020 | September 30, 2019 | |||||||||||||||||||||||||
| Number of Modifications | Recorded Investment | Number of Modifications | Recorded Investment | |||||||||||||||||||||||
| Troubled debt restructurings: | ||||||||||||||||||||||||||
| Commercial/agriculture real estate | 15 | $ | 5,037 | 9 | $ | 2,343 | ||||||||||||||||||||
| C&I/Agricultural operating | 12 | 1,490 | 12 | 1,914 | ||||||||||||||||||||||
| Residential mortgage | 8 | 672 | 3 | 344 | ||||||||||||||||||||||
| Total troubled debt restructurings | 35 | $ | 7,199 | 24 | $ | 4,601 | ||||||||||||||||||||
The following table provides information related to restructured loans that became in default during the three months ended September 30, 2020 and September 30, 2019:
| September 30, 2020 | September 30, 2019 | |||||||||||||||||||||||||
| Number of Modifications | Recorded Investment | Number of Modifications | Recorded Investment | |||||||||||||||||||||||
| Troubled debt restructurings: | ||||||||||||||||||||||||||
| Commercial/agriculture real estate | — | $ | — | 2 | $ | 120 | ||||||||||||||||||||
| Residential mortgage | 2 | 234 | — | — | ||||||||||||||||||||||
| Total troubled debt restructurings | 2 | $ | 234 | 2 | $ | 120 | ||||||||||||||||||||
The following table provides information related to restructured loans that became in default during the nine months ended September 30, 2020 and September 30, 2019:
| September 30, 2020 | September 30, 2019 | |||||||||||||||||||||||||
| Number of Modifications | Recorded Investment | Number of Modifications | Recorded Investment | |||||||||||||||||||||||
| Troubled debt restructurings: | ||||||||||||||||||||||||||
| Commercial/agriculture real estate | 2 | $ | 140 | 7 | $ | 227 | ||||||||||||||||||||
| C&I/Agricultural operating | 1 | 78 | 4 | 857 | ||||||||||||||||||||||
| Residential mortgage | 3 | 279 | — | — | ||||||||||||||||||||||
| Total troubled debt restructurings | 6 | $ | 497 | 11 | $ | 1,084 | ||||||||||||||||||||
35
All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheet are as follows:
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Accountable for under ASC 310-30 (Purchased Credit Impaired “PCI” loans) | ||||||||||||||
| Outstanding balance | $ | 25,083 | $ | 38,268 | ||||||||||
| Carrying amount | $ | 23,422 | $ | 31,978 | ||||||||||
| Accountable for under ASC 310-20 (non-PCI loans) | ||||||||||||||
| Outstanding balance | $ | 299,251 | $ | 386,476 | ||||||||||
| Carrying amount | $ | 294,201 | $ | 383,275 | ||||||||||
| Total acquired loans | ||||||||||||||
| Outstanding balance | $ | 324,334 | $ | 424,744 | ||||||||||
| Carrying amount | $ | 317,623 | $ | 415,253 | ||||||||||
The following table provides changes in accretable discounts for all acquired loans from prior acquisitions with deteriorated credit quality:
| September 30, 2020 | September 30, 2019 | |||||||||||||
| Accretable discount, beginning of period | $ | 3,201 | $ | 3,163 | ||||||||||
| Additions to accretable discount for acquired performing loans | — | 814 | ||||||||||||
| Accelerated accretion from payoff of certain PCI loans with transferred non-accretable difference | (99) | — | ||||||||||||
| Transfers from non-accretable difference to accretable discount | 2,704 | 80 | ||||||||||||
| Scheduled accretion | (756) | (622) | ||||||||||||
| Accretable discounts, end of period | $ | 5,050 | $ | 3,435 | ||||||||||
Non-accretable difference on purchase credit impaired loans was $1,661 and $6,290 at September 30, 2020 and December 31, 2019, respectively.
36
NOTE 4 – MORTGAGE SERVICING RIGHTS
Mortgage servicing rights--Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans as of September 30, 2020 and December 31, 2019 were $555,700 and $524,715, respectively, and consisted of one to four family residential real estate loans. These loans are serviced primarily for the Federal Home Loan Mortgage Corporation, Federal Home Loan Bank and the Federal National Mortgage Association. The current period valuation allowance is included as amortization of mortgage servicing rights in non-interest expense on the consolidated statement of operations.
Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits were $6,753 and $2,868, at September 30, 2020 and December 31, 2019, respectively. Mortgage servicing rights activity for the nine month period ended September 30, 2020 and twelve months ended December 31, 2019 were as follows:
| As of and for the Nine Months Ended | As of and for the Twelve Months Ended | |||||||||||||
| Mortgage servicing rights: | September 30, 2020 | December 31, 2019 | ||||||||||||
| Mortgage servicing assets, net; beginning of period | $ | 4,541 | $ | 4,486 | ||||||||||
| MSR asset acquired | — | — | ||||||||||||
| Increase in MSR assets resulting from transfers of financial assets | 1,546 | 904 | ||||||||||||
| Amortization during the period | (908) | (849) | ||||||||||||
| 5,179 | 4,541 | |||||||||||||
| Valuation Allowances: | ||||||||||||||
| Balance at beginning of period | (259) | — | ||||||||||||
| Additions | (1,422) | (259) | ||||||||||||
| Recoveries | — | — | ||||||||||||
| Write-downs | — | — | ||||||||||||
| Balance at end of period | (1,681) | (259) | ||||||||||||
| Mortgage servicing assets, net; end of period | $ | 3,498 | $ | 4,282 | ||||||||||
| Fair value of MSR asset; end of period | $ | 3,509 | $ | 4,309 | ||||||||||
| Residential mortgage loans serviced for others | $ | 555,700 | $ | 524,715 | ||||||||||
| Net book value of MSR asset to loans serviced for others | 0.63 | % | 0.82 | % | ||||||||||
37
NOTE 5 – LEASES
We have operating leases for our corporate offices (1), bank branch offices (6), other production offices (1) and certain office equipment. Our leases have remaining lease terms ranging from approximately 3 months to 8 years, some of which include options to extend the leases for up to 5 additional years. As of September 30, 2020, we have no additional lease commitments that have not yet commenced.
| Nine Months Ended | ||||||||||||||
| September 30, 2020 | September 30, 2019 | |||||||||||||
| Supplemental cash flow information related to leases was as follows: | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | 477 | $ | 665 | ||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||
| Operating leases | $ | — | $ | 158 | ||||||||||
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Supplemental balance sheet information related to leases was as follows: | ||||||||||||||
| Operating lease right-of-use assets | $ | 2,803 | $ | 2,787 | ||||||||||
| Operating lease liabilities | $ | 2,910 | $ | 2,845 | ||||||||||
| Weighted average remaining lease term in years; operating leases | 6.1 | 6.63 | ||||||||||||
| Weighted average discount rate; operating leases | 2.63 | % | 3.07 | % | ||||||||||
Cash obligations under lease contracts are as follows:
| Fiscal years ending December 31, | |||||
| 2020 | $ | 161 | |||
| 2021 | 592 | ||||
| 2022 | 558 | ||||
| 2023 | 505 | ||||
| 2024 | 419 | ||||
| Thereafter | 1,229 | ||||
| Total | 3,464 | ||||
| Less: effects of discounting | (554) | ||||
| Lease liability recognized | $ | 2,910 | |||
38
NOTE 6 – DEPOSITS
The following is a summary of deposits by type at September 30, 2020 and December 31, 2019, respectively:
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Non-interest bearing demand deposits | $ | 229,217 | $ | 168,157 | ||||||||||
| Interest bearing demand deposits | 279,648 | 223,102 | ||||||||||||
| Savings accounts | 191,511 | 156,599 | ||||||||||||
| Money market accounts | 246,651 | 246,430 | ||||||||||||
| Certificate accounts | 323,751 | 401,414 | ||||||||||||
| Total deposits | $ | 1,270,778 | $ | 1,195,702 | ||||||||||
| Brokered deposits included above: | $ | 3,250 | $ | 50,377 | ||||||||||
At September 30, 2020, the scheduled maturities of time deposits were as follows:
| September 30, 2021 | $ | 216,854 | ||||||
| September 30, 2022 | 96,391 | |||||||
| September 30, 2023 | 6,669 | |||||||
| September 30, 2024 | 2,976 | |||||||
| September 30, 2025 | 861 | |||||||
| After September 30, 2025 | — | |||||||
| Total | $ | 323,751 | ||||||
39
NOTE 7 – FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES AND OTHER BORROWINGS
A summary of Federal Home Loan Bank advances and other borrowings at September 30, 2020 and December 31, 2019 is as follows:
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||
| Stated Maturity | Amount | Range of Stated Rates | Amount | Range of Stated Rates | ||||||||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank advances (1), (2), (3), (4), (5) | 2020 | $ | 1,000 | 1.76 | % | 1.76 | % | $ | 69,000 | 1.67 | % | 2.05 | % | |||||||||||||||||||||||||||||||
| 2021 | 8,000 | — | % | 2.16 | % | 4,000 | 1.85 | % | 2.16 | % | ||||||||||||||||||||||||||||||||||
| 2022 | 15,000 | 2.34 | % | 2.45 | % | 15,000 | 2.34 | % | 2.45 | % | ||||||||||||||||||||||||||||||||||
| 2023 | 20,000 | 1.43 | % | 1.44 | % | — | — | % | — | % | ||||||||||||||||||||||||||||||||||
| 2024 | 20,530 | — | % | 1.45 | % | 530 | — | % | — | % | ||||||||||||||||||||||||||||||||||
| 2025 | 5,000 | 1.45 | % | 1.45 | % | — | — | % | — | % | ||||||||||||||||||||||||||||||||||
| 2029 | 42,500 | 1.00 | % | 1.13 | % | 42,500 | 1.00 | % | 1.13 | % | ||||||||||||||||||||||||||||||||||
| 2030 | 12,500 | 0.52 | % | 0.86 | % | — | — | % | — | % | ||||||||||||||||||||||||||||||||||
| Subtotal | 124,530 | 131,030 | ||||||||||||||||||||||||||||||||||||||||||
| Unamortized discount on acquired notes | (39) | (59) | ||||||||||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank advances, net | $ | 124,491 | $ | 130,971 | ||||||||||||||||||||||||||||||||||||||||
| Senior Notes (6) | 2031 | $ | 28,856 | 3.50 | % | 3.50 | % | $ | 28,856 | 4.00 | % | 4.75 | % | |||||||||||||||||||||||||||||||
| Subordinated Notes (7) | 2027 | $ | 15,000 | 6.75 | % | 6.75 | % | $ | 15,000 | 6.75 | % | 6.75 | % | |||||||||||||||||||||||||||||||
| 2030 | 15,000 | 6.00 | % | 6.00 | % | |||||||||||||||||||||||||||||||||||||||
| $ | 30,000 | |||||||||||||||||||||||||||||||||||||||||||
| Unamortized debt issuance costs | $ | (559) | $ | (296) | ||||||||||||||||||||||||||||||||||||||||
| Total other borrowings | $ | 58,297 | $ | 43,560 | ||||||||||||||||||||||||||||||||||||||||
| Totals | $ | 182,788 | $ | 174,531 | ||||||||||||||||||||||||||||||||||||||||
(1) The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $681,951 and $792,909 at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $105,858 compared to $203,935 as of December 31, 2019.
(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $162,530 and $151,530, during the nine months ended September 30, 2020 and the twelve months ended December 31, 2019, respectively.
(3) The weighted-average interest rates on FHLB borrowings maturing within twelve months as of September 30, 2020 and December 31, 2019 were 0.82% and 1.74%, respectively.
(4) Six of the FHLB notes with remaining balances totaling $9,530 were acquired as a result of the F&M acquisition. These notes mature on various dates through 2024 with a weighted average rate of 2.02% and weighted average maturity of 14 months.
(5) FHLB term notes totaling $55,000, with various maturity dates in 2029 and 2030, can be called or replaced by the FHLB on a quarterly basis, beginning approximately three months after the initial advance.
(6) Senior notes, entered into by the Company in June 2019 consist of the following:
(a) A term note, requiring quarterly interest-only payments through June 2022, and quarterly principal and interest payments thereafter. Interest is variable, based on US Prime rate with a floor rate of 3.50%.
40
(b) A $5,000 line of credit, maturing in August 2021, that remains undrawn upon.
(7) Subordinated notes resulted from the following:
(a) The Company’s private sale in August 2017, which bears a fixed interest rate of 6.75% for five years. In August 2022, they convert to a three-month LIBOR plus 4.90% rate, and the interest rate will reset quarterly thereafter. Interest-only payments are due quarterly.
(b) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in August 2020, which bears a fixed interest rate of 6.00% for five years. In September 2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.
Federal Home Loan Bank Letters of Credit
The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank. This irrevocable standby letter of credit (“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest bearing deposit balances. These balances were $180,325 and $147,991 at September 30, 2020 and December 31, 2019, respectively.
Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“FRB PPPLF”) Program
The Bank has originated Small Business Association’s Paycheck Protection Program (“SBA PPP”) loans and has complied with the requirements to pledge these loans to the FRB PPPLF program which provides 100% funding for SBA PPP loans upon request. The Bank has no outstanding loan balances under this facility at September 30, 2020 and December 31, 2019. Maximum month-end borrowed amounts outstanding under this agreement were $25,136 and $0, during the nine months ended September 30, 2020 and the twelve months ended December 31, 2019, respectively.
NOTE 8 - CAPITAL MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Although these terms are not used to represent overall financial condition, if adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2020, the Bank was categorized as “Well Capitalized”, under Prompt Corrective Action Provisions.
The Bank’s Tier 1 (leverage) and risk-based capital ratios at September 30, 2020 and December 31, 2019, respectively, are presented below:
41
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total capital (to risk weighted assets) | $ | 170,610 | 15.0 | % | $ | 91,021 | > = | 8.0 | % | $ | 113,776 | > = | 10.0 | % | ||||||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 156,388 | 13.7 | % | 68,266 | > = | 6.0 | % | 91,021 | > = | 8.0 | % | |||||||||||||||||||||||||||||||||||||||
| Common equity tier 1 capital (to risk weighted assets) | 156,388 | 13.7 | % | 51,199 | > = | 4.5 | % | 73,955 | > = | 6.5 | % | |||||||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to adjusted total assets) | 156,388 | 9.9 | % | 63,465 | > = | 4.0 | % | 79,331 | > = | 5.0 | % | |||||||||||||||||||||||||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total capital (to risk weighted assets) | $ | 160,302 | 13.1 | % | $ | 98,174 | > = | 8.0 | % | $ | 122,718 | > = | 10.0 | % | ||||||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 149,982 | 12.2 | % | 73,631 | > = | 6.0 | % | 98,174 | > = | 8.0 | % | |||||||||||||||||||||||||||||||||||||||
| Common equity tier 1 capital (to risk weighted assets) | 149,982 | 12.2 | % | 55,223 | > = | 4.5 | % | 79,767 | > = | 6.5 | % | |||||||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to adjusted total assets) | 149,982 | 10.4 | % | 57,834 | > = | 4.0 | % | 72,293 | > = | 5.0 | % | |||||||||||||||||||||||||||||||||||||||
The Company’s Tier 1 (leverage) and risk-based capital ratios at September 30, 2020 and December 31, 2019, respectively, are presented below:
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total capital (to risk weighted assets) | $ | 163,250 | 14.3 | % | $ | 91,021 | > = | 8.0 | % | N/A | N/A | |||||||||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 119,028 | 10.5 | % | 68,266 | > = | 6.0 | % | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||
| Common equity tier 1 capital (to risk weighted assets) | 119,028 | 10.5 | % | 51,199 | > = | 4.5 | % | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to adjusted total assets) | 119,028 | 7.5 | % | 63,465 | > = | 4.0 | % | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total capital (to risk weighted assets) | $ | 137,259 | 11.2 | % | $ | 98,174 | > = | 8.0 | % | N/A | N/A | |||||||||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 111,939 | 9.1 | % | 73,631 | > = | 6.0 | % | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||
| Common equity tier 1 capital (to risk weighted assets) | 111,939 | 9.1 | % | 55,223 | > = | 4.5 | % | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to adjusted total assets) | 111,939 | 7.7 | % | 57,834 | > = | 4.0 | % | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||
-
42
NOTE 9 – STOCK-BASED COMPENSATION
In February 2005, the Company’s stockholders approved the Company’s 2004 Recognition and Retention Plan and 2004 Stock Option and Incentive Plan. These plans were terminated on January 18, 2018.
In February 2008, the Company’s stockholders approved the Company’s 2008 Equity Incentive Plan for a term of 10 years. As of September 30, 2020, 89,183 restricted shares and 181,000 options had been granted to eligible participants. Due to the plan’s expiration, no new awards can be granted under this plan. Restricted shares granted under the 2008 Equity Incentive Plan were awarded at no cost to the employee and vest pro rata over a to -year period from the grant date. Options granted to date under this plan vest pro rata over a -year period from the grant date. Unexercised, nonqualified stock options expire within 15 years of the grant date and unexercised incentive stock options expire within 10 years of the grant date.
On March 27, 2018, the stockholders of Citizens Community Bancorp, Inc. approved the 2018 Equity Incentive Plan. The aggregate number of shares of common stock reserved and available for issuance under the 2018 Equity Incentive Plan is 350,000 shares. As of September 30, 2020, 99,575 restricted shares had been granted under this plan. As of September 30, 2020, no stock options had been granted under this plan.
Net compensation expense related to restricted stock awards from these plans was $165 and $462 for the three and nine months ended September 30, 2020, compared to $127 and $370 for the three and nine months ended September 30, 2019.
Restricted Common Stock Award
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||
| Number of Shares | Weighted Average Grant Price | Number of Shares | Weighted Average Grant Price | |||||||||||||||||||||||
| Restricted Shares | ||||||||||||||||||||||||||
| Unvested and outstanding at beginning of year | 43,457 | $ | 12.76 | 75,407 | $ | 13.24 | ||||||||||||||||||||
| Granted | 45,507 | 11.79 | 12,847 | 11.50 | ||||||||||||||||||||||
| Vested | (14,545) | 12.78 | (32,630) | 12.89 | ||||||||||||||||||||||
| Forfeited | — | — | (12,167) | 13.28 | ||||||||||||||||||||||
| Unvested and outstanding at end of year | 74,419 | $ | 12.16 | 43,457 | $ | 12.76 | ||||||||||||||||||||
The Company accounts for stock-based employee compensation related to the Company’s 2008 Equity Incentive Plan and 2018 Equity Incentive Plan using the fair-value-based method. Accordingly, management records compensation expense based on the value of the award as measured on the grant date and then the Company recognizes that cost over the vesting period for the award. The compensation cost recognized for stock-based employee compensation related to these plans for the three and nine month periods ended September 30, 2020 was $3 and $11, respectively. The compensation cost recognized for stock-based employee compensation related to these plans for the three and nine month periods ended September 30, 2019 was $5 and $14, respectively.
43
Common Stock Option Awards
| Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||
| Outstanding at beginning of year | 78,100 | $ | 11.18 | |||||||||||||||||||||||
| Forfeited or expired | (5,000) | 12.77 | ||||||||||||||||||||||||
| Outstanding at end of year | 73,100 | $ | 11.08 | 5.75 | ||||||||||||||||||||||
| Exercisable at end of year | 52,900 | $ | 10.76 | 5.59 | $ | — | ||||||||||||||||||||
| Fully vested and expected to vest | 73,100 | $ | 11.08 | 5.75 | $ | — | ||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Outstanding at beginning of year | 108,930 | $ | 10.15 | |||||||||||||||||||||||
| Exercised | (28,430) | 7.12 | ||||||||||||||||||||||||
| Forfeited or expired | (2,400) | 12.38 | ||||||||||||||||||||||||
| Outstanding at end of year | 78,100 | $ | 11.18 | 6.55 | ||||||||||||||||||||||
| Exercisable at end of year | 44,700 | $ | 10.73 | 6.30 | $ | 67 | ||||||||||||||||||||
| Fully vested and expected to vest | 78,100 | $ | 11.18 | 6.55 | $ | 81 | ||||||||||||||||||||
Information related to the 2004 Stock Option and Incentive Plan and 2008 Equity Incentive Plan for the respective periods follows:
| Nine months ended September 30, 2020 | Twelve months ended December 31, 2019 | |||||||||||||
| Intrinsic value of options exercised | $ | — | $ | 130 | ||||||||||
| Cash received from options exercised | $ | — | $ | 203 | ||||||||||
| Tax benefit realized from options exercised | $ | — | $ | — | ||||||||||
NOTE 10 – FAIR VALUE ACCOUNTING
ASC Topic 820-10, “Fair Value Measurements and Disclosures” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:
Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.
Level 2- Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3- Significant unobservable inputs that reflect the Company’s assumptions about the factors that market participants would use in pricing an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.
The fair value of securities available for sale is determined by obtaining market price quotes from independent third parties wherever such quotes are available (Level 1 inputs); or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Where such quotes are not available, we utilize independent third party valuation analysis to support our own estimates and judgments in determining fair value (Level 3 inputs).
44
Assets Measured on a Recurring Basis
The following tables present the financial instruments measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:
| Fair Value | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||
| Investment securities: | |||||||||||||||||||||||
| U.S. government agency obligations | $ | 34,379 | $ | — | $ | 34,379 | $ | — | |||||||||||||||
| Obligations of states and political subdivisions | 140 | — | 140 | — | |||||||||||||||||||
| Mortgage-backed securities | 51,758 | — | 51,758 | — | |||||||||||||||||||
| Corporate debt securities | 15,364 | — | 15,364 | — | |||||||||||||||||||
| Corporate asset-based securities | 35,543 | — | 35,543 | — | |||||||||||||||||||
| Trust preferred securities | 13,724 | — | 13,724 | — | |||||||||||||||||||
| Total | $ | 150,908 | 150908000 | $ | — | $ | 150,908 | $ | — | ||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Investment securities: | |||||||||||||||||||||||
| U.S. government agency obligations | $ | 51,805 | $ | — | $ | 51,805 | $ | — | |||||||||||||||
| Obligations of states and political subdivisions | 281 | — | 281 | — | |||||||||||||||||||
| Mortgage-backed securities | 71,331 | — | 71,331 | — | |||||||||||||||||||
| Corporate debt securities | 18,725 | — | 18,725 | — | |||||||||||||||||||
| Corporate asset backed securities | 26,854 | — | 26,854 | — | |||||||||||||||||||
| Trust preferred securities | 11,123 | — | 11,123 | — | |||||||||||||||||||
| Total | $ | 180,119 | $ | — | $ | 180,119 | $ | — | |||||||||||||||
Assets Measured on Nonrecurring Basis
The following tables present the financial instruments measured at fair value on a nonrecurring basis as of September 30, 2020 and December 31, 2019:
| Carrying Value | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||
| Foreclosed and repossessed assets, net | $ | 812 | $ | — | $ | — | $ | 812 | |||||||||||||||
| Impaired loans with allocated allowances | 4,151 | — | — | 4,151 | |||||||||||||||||||
| Mortgage servicing rights | 3,498 | — | — | 3,509 | |||||||||||||||||||
| Total | $ | 8,461 | $ | — | $ | — | $ | 8,472 | |||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Foreclosed and repossessed assets, net | $ | 1,460 | $ | — | $ | — | $ | 1,460 | |||||||||||||||
| Impaired loans with allocated allowances | 3,175 | — | — | 3,175 | |||||||||||||||||||
| Mortgage servicing rights | 4,282 | — | — | 4,309 | |||||||||||||||||||
| Total | $ | 8,917 | $ | — | $ | — | $ | 8,944 | |||||||||||||||
45
The fair value of impaired loans referenced above was determined by obtaining independent third party appraisals and/or internally developed collateral valuations to support the Company’s estimates and judgments in determining the fair value of the underlying collateral supporting impaired loans.
The fair value of foreclosed and repossessed assets was determined by obtaining market price valuations from independent third parties wherever such quotes were available for other collateral owned. The Company utilized independent third party appraisals to support the Company’s estimates and judgments in determining fair value for other real estate owned.
The fair value of mortgage servicing rights was estimated using discounted cash flows based on current market rates and other factors.
The following table represents additional quantitative information about assets measured at fair value on a
recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine their fair value at
September 30, 2020.
| Fair Value | Valuation Techniques (1) | Significant Unobservable Inputs (2) | Range | ||||||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||
| Foreclosed and repossessed assets, net | $ | 812 | Appraisal value | Estimated costs to sell | 10 - 15% | ||||||||||||||||||
| Impaired loans with allocated allowances | $ | 4,151 | Appraisal value | Estimated costs to sell | 10 - 15% | ||||||||||||||||||
| Mortgage servicing rights | $ | 3,509 | Discounted cash flows | Discounted rates | 9 - 12% | ||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Foreclosed and repossessed assets, net | $ | 1,460 | Appraisal value | Estimated costs to sell | 10 - 15% | ||||||||||||||||||
| Impaired loans with allocated allowances | $ | 3,175 | Appraisal value | Estimated costs to sell | 10 - 15% | ||||||||||||||||||
| Mortgage servicing rights | $ | 4,309 | Discounted cash flows | Discounted rates | 9.5% - 12.5% | ||||||||||||||||||
(1) Fair value is generally determined through independent third-party appraisals of the underlying
collateral, which generally includes various level 3 inputs which are not observable.
(2) The fair value basis of impaired loans and real estate owned may be adjusted to reflect management
estimates of disposal costs including, but not limited to, real estate brokerage commissions, legal fees,
and delinquent property taxes.
46
The table below represents what we would receive to sell an asset or what we would have to pay to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount and estimated fair value of the Company’s financial instruments as of the dates indicated below were as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||
| Valuation Method Used | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | (Level I) | $ | 115,474 | $ | 115,474 | $ | 55,840 | $ | 55,840 | ||||||||||||||||||||
| Other interest-bearing deposits | (Level II) | 3,752 | 3,838 | 4,744 | 4,792 | ||||||||||||||||||||||||
| Securities available for sale “AFS” | (Level II) | 150,908 | 150,908 | 180,119 | 180,119 | ||||||||||||||||||||||||
| Securities held to maturity “HTM” | (Level II) | 16,927 | 17,233 | 2,851 | 2,957 | ||||||||||||||||||||||||
| Equity securities with readily determinable fair value | (Level I) | 187 | 187 | 246 | 246 | ||||||||||||||||||||||||
| Other investments | (Level II) | 15,075 | 15,075 | 15,005 | 15,005 | ||||||||||||||||||||||||
| Loans receivable, net | (Level III) | 1,215,303 | 1,204,923 | 1,167,060 | 1,161,660 | ||||||||||||||||||||||||
| Loans held for sale | (Level II) | 4,938 | 4,938 | 5,893 | 5,893 | ||||||||||||||||||||||||
| Mortgage servicing rights | (Level III) | 3,498 | 3,509 | 4,282 | 4,309 | ||||||||||||||||||||||||
| Accrued interest receivable | (Level 1) | 5,829 | 5,829 | 4,738 | 4,738 | ||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Deposits | (Level III) | $ | 1,270,778 | $ | 1,275,000 | $ | 1,195,702 | $ | 1,192,777 | ||||||||||||||||||||
| FHLB advances | (Level II) | 124,491 | 129,798 | 130,971 | 131,593 | ||||||||||||||||||||||||
| Other borrowings | (Level I) | 58,297 | 58,297 | 43,560 | 43,560 | ||||||||||||||||||||||||
| Accrued interest payable | (Level I) | 517 | 517 | 453 | 453 | ||||||||||||||||||||||||
47
NOTE 11 – OTHER COMPREHENSIVE INCOME (LOSS)
The following tables show the tax effects allocated to each component of other comprehensive income for the three and
nine months ended September 30, 2020 and 2019:
| Three months ended | |||||||||||||||||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | ||||||||||||||||||||||||||||||||||
| Before-Tax Amount | Tax Expense | Net-of-Tax Amount | Before-Tax Amount | Tax Expense | Net-of-Tax Amount | ||||||||||||||||||||||||||||||
| Unrealized gains on securities: | |||||||||||||||||||||||||||||||||||
| Net unrealized gains arising during the period | $ | 1,220 | $ | (335) | $ | 885 | $ | 440 | $ | (121) | $ | 319 | |||||||||||||||||||||||
| Reclassification adjustment for gains included in net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Other comprehensive income | $ | 1,220 | $ | (335) | $ | 885 | $ | 440 | $ | (121) | $ | 319 | |||||||||||||||||||||||
| Nine months ended | |||||||||||||||||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | ||||||||||||||||||||||||||||||||||
| Before-Tax Amount | Tax Expense | Net-of-Tax Amount | Before-Tax Amount | Tax Expense | Net-of-Tax Amount | ||||||||||||||||||||||||||||||
| Unrealized gains on securities: | |||||||||||||||||||||||||||||||||||
| Net unrealized gains arising during the period | $ | 2,052 | $ | (564) | $ | 1,488 | $ | 3,003 | $ | (826) | $ | 2,177 | |||||||||||||||||||||||
| Reclassification adjustment for gains included in net income | (156) | 43 | (113) | (26) | 7 | (19) | |||||||||||||||||||||||||||||
| Other comprehensive income | $ | 1,896 | $ | (521) | $ | 1,375 | $ | 2,977 | $ | (819) | $ | 2,158 | |||||||||||||||||||||||
The changes in the accumulated balances for each component of other comprehensive income (loss), net of tax for the twelve months ended December 31, 2019 and the nine months ended September 30, 2020 were as follows:
| Unrealized Gains (Losses) on Securities | Other Accumulated Comprehensive Income (Loss), net of tax | ||||||||||
| Beginning Balance, January 1, 2019 | $ | (2,540) | $ | (1,841) | |||||||
| Current year-to-date other comprehensive income | 1,953 | 1,415 | |||||||||
| Adoption of ASU 2016-01; Equity securities (1) | (62) | (45) | |||||||||
| Ending balance, December 31, 2019 | $ | (649) | $ | (471) | |||||||
| Current year-to-date other comprehensive income | 1,896 | 1,375 | |||||||||
| Ending balance, September 30, 2020 | $ | 1,247 | $ | 904 | |||||||
(1) Amounts reclassified to retained earnings due to January 1, 2019 adoption of ASU 2016-02. For further information, refer to Note 1, “Nature of Business and Summary of Significant Policies; Recent Pronouncements-Adopted”.
48
Reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 were as follows:
| Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
| Details about Accumulated Other Comprehensive Income (Loss) Components | Three months ended September 30, 2020 | Nine months ended September 30, 2020 | (1) | Affected Line Item on the Statement of Operations | ||||||||||||||||
| Unrealized gains and losses | ||||||||||||||||||||
| Sale of securities | $ | — | $ | 156 | Net gains on investment securities | |||||||||||||||
| Tax Effect | — | (43) | Provision for income taxes | |||||||||||||||||
| Total reclassifications for the period | $ | — | $ | 113 | Net gain attributable to common shareholders | |||||||||||||||
(1) Amounts in parentheses indicate decreases to income/loss.
Reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2019 were as follows:
| Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
| Details about Accumulated Other Comprehensive Income (Loss) Components | Three months ended September 30, 2019 | Nine months ended September 30, 2019 | (1) | Affected Line Item on the Statement of Operations | ||||||||||||||||
| Unrealized gains and losses | ||||||||||||||||||||
| Sale of securities | $ | — | $ | 26 | Net gains on investment securities | |||||||||||||||
| Tax Effect | — | (7) | Provision for income taxes | |||||||||||||||||
| Total reclassifications for the period | $ | — | $ | 19 | Net gain attributable to common shareholders | |||||||||||||||
(1) Amounts in parentheses indicate decreases to profit/loss.
49
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company intends that these forward-looking statements be covered by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “estimates”, “intend,” “may,” “preliminary,” “planned,” “potential,” “should,” “will,” “would,” or the negative of those terms or other words of similar meaning. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are inherently subject to many uncertainties in the Company’s operations and business environment.
Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 10, 2020 (“2019 10-K”), the matters described in “Risk Factors” in Item 1A of our Form 10-Q for the quarters ended March 31, 2020, June 30, 2020 and in Item 1A of this Form 10-Q, and the following:
•conditions in the financial markets and economic conditions generally;
•adverse impacts to the Company or Bank arising from the COVID-19 pandemic;
•the possibility of a deterioration in the residential real estate markets;
•interest rate risk;
•lending risk;
•the sufficiency of loan allowances;
•changes in the fair value or ratings downgrades of our securities;
•competitive pressures among depository and other financial institutions;
•our ability to maintain our reputation;
•our ability to realize the benefits of net deferred tax assets;
•our ability to maintain or increase our market share;
•acts of terrorism and political or military actions by the United States or other governments;
•legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank;
•increases in FDIC insurance premiums or special assessments by the FDIC;
•disintermediation risk;
•our inability to obtain needed liquidity;
•risks related to the ongoing integration of F&M into the Company’s operations;
•our ability to successfully execute our acquisition growth strategy;
•risks posed by acquisitions and other expansion opportunities, including difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits;
•our ability to raise capital needed to fund growth or meet regulatory requirements;
•the possibility that our internal controls and procedures could fail or be circumvented;
•our ability to attract and retain key personnel;
•our ability to keep pace with technological change;
•cybersecurity risks;
•changes in federal or state tax laws;
•changes in accounting principles, policies or guidelines and their impact on financial performance;
•restrictions on our ability to pay dividends; and
•the potential volatility of our stock price.
Stockholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this filing and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this report.
50
GENERAL
The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of September 30, 2020, and our consolidated results of operations for the three and nine months ended September 30, 2020, compared to the same period in the prior fiscal year for the three and nine months ended September 30, 2019. This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2019 10-K. Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses and their related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that our management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. In addition to the policies included in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included as an exhibit in our annual report on our 2019 10-K, our critical accounting estimates are as follows:
Allowance for Loan Losses.
We maintain an allowance for loan losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated probable incurred losses in our loan portfolio. In evaluating the level of the allowance for loan loss, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and other relevant factors determined by management. We follow all applicable regulatory guidance, including the “Interagency Policy Statement on the Allowance for Loan and Lease Losses,” issued by the Federal Financial Institutions Examination Council (FFIEC). We believe that the Bank’s Allowance for Loan Losses Policy conforms to all applicable regulatory requirements. However, based on periodic examinations by regulators, the amount of the allowance for loan losses recorded during a particular period may be adjusted.
Our determination of the allowance for loan losses is based on (1) specific allowances for specifically identified and evaluated impaired loans and their corresponding estimated loss based on likelihood of default, payment history, and net realizable value of underlying collateral. Specific allocations for collateral dependent loans are based on fair value of the underlying collateral relative to the unpaid principal balance of individually impaired loans. For loans that are not collateral dependent, the specific allocation is based on the present value of expected future cash flows discounted at the loan’s original effective interest rate through the repayment period; and (2) a general allowance on loans not specifically identified in (1) above, based on historical loss ratios, which are adjusted for qualitative and general economic factors. We continue to refine our allowance for loan losses methodology, with an increased emphasis on historical performance adjusted for applicable economic and qualitative factors.
Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change. In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.
Goodwill.
We account for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. The Company does not amortize goodwill and any acquired intangible asset with an indefinite useful economic life, but reviews them for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. A reporting unit is defined as any distinct, separately
51
identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of September 30, 2020 which is related to its banking activities. The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of December 31, 2019. The Company performed a goodwill impairment analysis as of September 30, 2020, due to triggering events being identified, and determined that goodwill was not impaired.
Fair Value Measurements and Valuation Methodologies.
We apply various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit intangible assets, other assets and liabilities obtained or assumed in business combinations, and certain other financial instruments. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations, financial condition or disclosures of fair value information.
In addition to valuation, the Company must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statement of income. Examples include but are not limited to; loans, investment securities, goodwill, core deposit intangible assets and deferred tax assets, among others. Specific assumptions, estimates and judgments utilized by management are discussed in detail herein in management’s discussion and analysis of financial condition and results of operations and in notes 1, 2, 3, 4 and 10 of Condensed Notes to Consolidated Financial Statements.
Income Taxes.
Amounts provided for income tax expenses are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities, which arise principally from temporary differences between the amounts reported in the financial statements and the tax basis of certain assets and liabilities, are included in the amounts provided for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and if necessary, tax planning strategies in making this assessment.
The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and application of specific provisions of federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be material to our consolidated results of our operations and reported earnings. We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements. As of September 30, 2020, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.
52
STATEMENT OF OPERATIONS ANALYSIS
Net Interest Income. Net interest income represents the difference between the dollar amount of interest earned on interest-bearing assets and the dollar amount of interest paid on interest-bearing liabilities. The interest income and expense of financial institutions (including those of the Bank) are significantly affected by general economic conditions, competition, policies of regulatory authorities and other factors.
Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest earning assets. Net interest margin currently exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets. The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and nine-month periods ended September 30, 2020 and September 30, 2019, respectively.
Net interest income was $11.9 million for the three months ended September 30, 2020 and $36.9 million for the nine months ended September 30, 2020, compared to $11.6 million for the three months ended September 30, 2019 and $31.7 million of the nine months ended September 30, 2019. For the three months ended September 30, 2020, net interest income benefited from the origination of $139 million of SBA Paycheck Protection Program (“PPP”) loans and organic loan growth partially offset by a decrease in net interest margin percentage.
The net interest margin for the three-month period ended September 30, 2020 was 3.11%, compared to 3.34% for the three-month period ended September, 2019. The decrease in net interest margin was largely due to: (1) the impact of the Federal Reserve actions to offset the impact of the pandemic in March 2020, during which it lowered overnight interest rates by 125 basis points in 12 days and (2) market reactions to decreasing longer-term interest rates on loans, investments and cash and cash equivalents security yields; partially offset by lower deposit rates due to management action to reduce interest rates. The impact of higher cash and cash equivalents balances decreased the interest margin percentage by two basis points as the rate impact is covered above. Higher non-accretable difference accretion of two basis points offset the negative impact of higher cash balances above.
The net interest margin for the nine-months ended September 30, 2020 was 3.36%, compared to 3.35% for the nine-month period ended September 30, 2019. The modest increase in net interest margin was due to the increase in the accretion of purchased credit impaired discounts, which increased net interest margin by 11 basis points. Other factors affecting the net interest margin for the nine month periods of 2020 to 2019 are similar to those discussed above, with a two basis point decrease in net interest margin due to the impact of higher cash and cash equivalent balances as the rate impact is discussed above.
Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following net interest income analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates on a tax equivalent basis. Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three and nine-month periods ended September 30, 2020, and for the three and nine-month periods ended September 30, 2019. Non-accruing loans have been included in the table as loans carrying a zero yield.
53
NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS
(Dollar amounts in thousands)
Three months ended September 30, 2020 compared to the three months ended September 30, 2019:
| Three months ended September 30, 2020 | Three months ended September 30, 2019 | ||||||||||||||||||||||||||||||||||
| Average Balance | Interest Income/ Expense | Average Yield/ Rate (1) | Average Balance | Interest Income/ Expense | Average Yield/ Rate (1) | ||||||||||||||||||||||||||||||
| Average interest earning assets: | |||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 77,774 | $ | 18 | 0.09 | % | $ | 32,376 | $ | 203 | 2.49 | % | |||||||||||||||||||||||
| Loans | 1,258,224 | 14,154 | 4.48 | % | 1,143,252 | 14,646 | 5.08 | % | |||||||||||||||||||||||||||
| Interest-bearing deposits | 3,752 | 23 | 2.44 | % | 5,577 | 34 | 2.42 | % | |||||||||||||||||||||||||||
| Investment securities (1) | 166,622 | 846 | 2.02 | % | 185,921 | 1,174 | 2.56 | % | |||||||||||||||||||||||||||
| Other investments | 15,145 | 177 | 4.65 | % | 13,072 | 166 | 5.04 | % | |||||||||||||||||||||||||||
| Total interest earning assets (1) | $ | 1,521,517 | $ | 15,218 | 3.98 | % | $ | 1,380,198 | $ | 16,223 | 4.67 | % | |||||||||||||||||||||||
| Average interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Savings accounts | $ | 183,381 | $ | 98 | 0.21 | % | $ | 158,967 | $ | 155 | 0.39 | % | |||||||||||||||||||||||
| Demand deposits | 285,993 | 231 | 0.32 | % | 219,955 | 550 | 0.99 | % | |||||||||||||||||||||||||||
| Money market | 255,160 | 280 | 0.44 | % | 200,647 | 593 | 1.17 | % | |||||||||||||||||||||||||||
| CD’s | 297,691 | 1,469 | 1.96 | % | 381,331 | 1,870 | 1.95 | % | |||||||||||||||||||||||||||
| IRA’s | 41,852 | 177 | 1.68 | % | 44,184 | 203 | 1.82 | % | |||||||||||||||||||||||||||
| Total deposits | $ | 1,064,077 | $ | 2,255 | 0.84 | % | $ | 1,005,084 | $ | 3,371 | 1.33 | % | |||||||||||||||||||||||
| FHLB Advances and other borrowings | 173,758 | 1,054 | 2.41 | % | 169,908 | 1,259 | 2.94 | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | $ | 1,237,835 | $ | 3,309 | 1.06 | % | $ | 1,174,992 | $ | 4,630 | 1.56 | % | |||||||||||||||||||||||
| Net interest income | $ | 11,909 | $ | 11,593 | |||||||||||||||||||||||||||||||
| Interest rate spread | 2.92 | % | 3.11 | % | |||||||||||||||||||||||||||||||
| Net interest margin (1) | 3.11 | % | 3.34 | % | |||||||||||||||||||||||||||||||
| Average interest earning assets to average interest-bearing liabilities | 1.23 | 1.17 | |||||||||||||||||||||||||||||||||
(1) Fully taxable equivalent (FTE). The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended September 30, 2020 and September 30, 2019. The FTE adjustment to net interest income included in the rate calculations totaled $0 and $27 thousand for the three months ended September 30, 2020 and September 30, 2019, respectively.
54
NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS
(Dollar amounts in thousands)
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019:
| Nine months ended September 30, 2020 | Nine months ended September 30, 2019 | ||||||||||||||||||||||||||||||||||
| Average Balance | Interest Income/ Expense | Average Yield/ Rate (1) | Average Balance | Interest Income/ Expense | Average Yield/ Rate (1) | ||||||||||||||||||||||||||||||
| Average interest earning assets: | |||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 42,946 | $ | 141 | 0.44 | % | $ | 29,489 | $ | 542 | 2.46 | % | |||||||||||||||||||||||
| Loans | 1,232,678 | 44,300 | 4.8 | % | 1,054,492 | 40,036 | 5.08 | % | |||||||||||||||||||||||||||
| Interest-bearing deposits | 3,967 | 73 | 2.46 | % | 6,153 | 107 | 2.33 | % | |||||||||||||||||||||||||||
| Investment securities (1) | 173,595 | 2,965 | 2.28 | % | 167,023 | 3,119 | 2.58 | % | |||||||||||||||||||||||||||
| Other investments | 15,104 | 533 | 4.71 | % | 11,853 | 473 | 5.34 | % | |||||||||||||||||||||||||||
| Total interest earning assets (1) | $ | 1,468,290 | $ | 48,012 | 4.37 | % | $ | 1,269,010 | $ | 44,277 | 4.68 | % | |||||||||||||||||||||||
| Average interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Savings accounts | $ | 169,754 | $ | 348 | 0.27 | % | $ | 156,851 | $ | 479 | 0.41 | % | |||||||||||||||||||||||
| Demand deposits | 262,748 | 865 | 0.44 | % | 200,387 | 1,288 | 0.86 | % | |||||||||||||||||||||||||||
| Money market | 244,965 | 1,240 | 0.68 | % | 172,671 | 1,423 | 1.10 | % | |||||||||||||||||||||||||||
| CD’s | 326,776 | 5,021 | 2.05 | % | 348,139 | 5,163 | 1.98 | % | |||||||||||||||||||||||||||
| IRA’s | 42,221 | 568 | 1.80 | % | 41,576 | 537 | 1.73 | % | |||||||||||||||||||||||||||
| Total deposits | $ | 1,046,464 | $ | 8,042 | 1.03 | % | $ | 919,624 | $ | 8,890 | 1.29 | % | |||||||||||||||||||||||
| FHLB Advances and other borrowings | 185,256 | 3,087 | 2.23 | % | 153,960 | 3649 | 3.17 | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | $ | 1,231,720 | $ | 11,129 | 1.21 | % | $ | 1,073,584 | $ | 12,539 | 1.56 | % | |||||||||||||||||||||||
| Net interest income | $ | 36,883 | $ | 31,738 | |||||||||||||||||||||||||||||||
| Interest rate spread | 3.16 | % | 3.12 | % | |||||||||||||||||||||||||||||||
| Net interest margin (1) | 3.36 | % | 3.35 | % | |||||||||||||||||||||||||||||||
| Average interest earning assets to average interest-bearing liabilities | 1.19 | 1.18 | |||||||||||||||||||||||||||||||||
(1) Fully taxable equivalent (FTE). The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the nine months ended September 30, 2020 and September 30, 2019. The FTE adjustment to net interest income included in the rate calculations totaled $1 thousand and $103 thousand for the nine months ended September 30, 2020 and September 30, 2019, respectively.
Rate/Volume Analysis. The following table presents the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e. holding the initial rate constant); and (2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e. holding the initial balance constant). Rate changes have been discussed previously. For the three months ended September 30, 2020, compared to the three months ended September 30, 2019, the loan volume increase is primarily due to SBA PPP originations, and the impact of organic growth since October 1, 2019. The decrease in certificate volumes is due to planned runoff of brokered CD’s and to a lesser extent, retail CD’s, partially offset by growth in non-maturity deposits. Volume change factors for the nine month period are similar to the three month period, along with the impact of having nine months of F&M balances in 2020 compared to only three months in the comparable 2019 period, as the F&M acquisition closed July 1, 2019.
55
RATE / VOLUME ANALYSIS
(Dollar amounts in thousands)
Three months ended September 30, 2020 compared to the three months ended September 30, 2019.
| Increase (decrease) due to | |||||||||||||||||
| Volume | Rate | Net | |||||||||||||||
| Interest income: | |||||||||||||||||
| Cash and cash equivalents | $ | 181 | $ | (366) | $ | (185) | |||||||||||
| Loans | 1,393 | (1,885) | (492) | ||||||||||||||
| Interest-bearing deposits | (11) | — | (11) | ||||||||||||||
| Investment securities | (115) | (213) | (328) | ||||||||||||||
| Other investments | 25 | (14) | 11 | ||||||||||||||
| Total interest earning assets | 1,473 | (2,478) | (1,005) | ||||||||||||||
| Interest expense: | |||||||||||||||||
| Savings accounts | 21 | (78) | (57) | ||||||||||||||
| Demand deposits | 136 | (455) | (319) | ||||||||||||||
| Money market accounts | 135 | (448) | (313) | ||||||||||||||
| CD’s | (413) | 12 | (401) | ||||||||||||||
| IRA’s | (10) | (16) | (26) | ||||||||||||||
| Total deposits | (131) | (985) | (1,116) | ||||||||||||||
| FHLB Advances and other borrowings | 28 | (233) | (205) | ||||||||||||||
| Total interest bearing liabilities | (103) | (1,218) | (1,321) | ||||||||||||||
| Net interest income | $ | 1,576 | $ | (1,260) | $ | 316 | |||||||||||
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.
| Increase (decrease) due to | |||||||||||||||||
| Volume | Rate | Net | |||||||||||||||
| Interest income: | |||||||||||||||||
| Cash and cash equivalents | $ | 191 | $ | (592) | $ | (401) | |||||||||||
| Loans | 6,504 | (2,240) | 4,264 | ||||||||||||||
| Interest-bearing deposits | (40) | 6 | (34) | ||||||||||||||
| Investment securities | 123 | (277) | (154) | ||||||||||||||
| Other investments | 120 | (60) | 60 | ||||||||||||||
| Total interest earning assets | 6,898 | (3,163) | 3,735 | ||||||||||||||
| Interest expense: | |||||||||||||||||
| Savings accounts | 37 | (168) | (131) | ||||||||||||||
| Demand deposits | 337 | (760) | (423) | ||||||||||||||
| Money market accounts | 497 | (680) | (183) | ||||||||||||||
| CD’s | (324) | 182 | (142) | ||||||||||||||
| IRA’s | 8 | 23 | 31 | ||||||||||||||
| Total deposits | 555 | (1,403) | (848) | ||||||||||||||
| FHLB Advances and other borrowings | 662 | (1,224) | (562) | ||||||||||||||
| Total interest bearing liabilities | 1,217 | (2,627) | (1,410) | ||||||||||||||
| Net interest income | $ | 5,681 | $ | (536) | $ | 5,145 | |||||||||||
Provision for Loan Losses. We determine our provision for loan losses (“provision”) based on our desire to provide an adequate allowance for loan losses (“ALL”) to reflect probable and inherent credit losses in our loan portfolio. We continue to monitor adverse general economic conditions that could affect our commercial and agricultural portfolios in the future.
56
Total provision for loan losses expense for the three and nine months ended September 30, 2020 was $1,500 and $5,250, respectively. The provision for loan losses was impacted by loan growth, net loan charge offs, increases in unallocated, increases in specific reserves on impaired loans and continued anticipation of pandemic-related adverse economic impacts, including various “Stay-at-Home Orders” which continued to result in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain businesses, including bank borrowers.
Management believes that the provision taken for the current year three-month period is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans. We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ALL. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could all affect the adequacy of our ALL. If there are significant charge-offs against the ALL, or we otherwise determine that the ALL is inadequate, we will need to record an additional provision in the future.
Non-interest Income. The following table reflects the various components of non-interest income for the three and nine month periods ended September 30, 2020 and 2019, respectively.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Non-interest Income: | |||||||||||||||||||||||||||||||||||
| Service charges on deposit accounts | $ | 431 | $ | 625 | (31.04) | % | $ | 1,336 | $ | 1,756 | (23.92) | % | |||||||||||||||||||||||
| Interchange income | 556 | 476 | 16.81 | % | 1,509 | 1,267 | 19.10 | % | |||||||||||||||||||||||||||
| Loan servicing income | 1,144 | 714 | 60.22 | % | 3,144 | 1,902 | 65.30 | % | |||||||||||||||||||||||||||
| Gain on sale of loans | 1,987 | 679 | 192.64 | % | 4,585 | 1,560 | 193.91 | % | |||||||||||||||||||||||||||
| Loan fees and service charges | 320 | 471 | (32.06) | % | 1,041 | 860 | 21.05 | % | |||||||||||||||||||||||||||
| Insurance commission income | — | 197 | (100.00) | % | 475 | 573 | (17.10) | % | |||||||||||||||||||||||||||
| Net gains on investment securities | (1) | 96 | (101.04) | % | 97 | 151 | (35.76) | % | |||||||||||||||||||||||||||
| Net gain on sale of branch | — | — | N/M | — | 2,295 | N/M | |||||||||||||||||||||||||||||
| Net gain on sale of acquired business lines | 180 | — | N/M | 432 | — | N/M | |||||||||||||||||||||||||||||
| Settlement proceeds | — | — | N/M | 131 | — | N/M | |||||||||||||||||||||||||||||
| Other | 445 | 363 | 22.59 | % | 928 | 827 | 12.21 | % | |||||||||||||||||||||||||||
| Total non-interest income | $ | 5,062 | $ | 3,621 | 39.80 | % | $ | 13,678 | $ | 11,191 | 22.22 | % | |||||||||||||||||||||||
The growth in most line items, for the nine months ended September 30, are due to the impact of the F&M acquisition on July 1, 2019.
Service charges on deposit accounts decreased to $431 and $1,336 for the three and nine months ended September 30, 2020, from $625 and $1,756 in the comparable prior year periods. This decrease was due to lower retail customer activity and due to higher balances of retail checking accounts, primarily in the three months ended September 30, 2020.
Loan servicing income increased largely due to increased capitalized mortgage servicing rights due to higher mortgage loan origination fees in both the current three and nine-month periods.
Gain on sale of loans increased in both the current three and nine-month periods due to higher mortgage loan origination sold volumes.
The change in loan fees and service charges for the three and nine months ended September 30, 2020, is largely due to changes in commercial loan customer activity, which was significantly higher in the first quarter of 2020
The Company recognized a gain on sale of its Michigan branch of $2,295 in the second quarter of 2019.
In the quarter ended September 30, 2020, the Bank’s acquired wealth management business partner exercised their contractual call originated prior to the acquisition, resulting in the sale of the wealth management business. The sale resulted in a $180 gain, Also, the Company sold the Wells Insurance Agency in June 2020, realizing a net gain of $252.
57
During the quarter ended June 30, 2020, the Company recognized $131 of non-interest income related to a private mortgage-backed security claim. This distribution represents a supplement to the proceeds received in March 2017 from this private mortgage-backed security, previously owned by the Bank, and sold in 2011.
Non-interest Expense. The following table reflects the various components of non-interest expense for the three and nine month periods ended September 30, 2020 and 2019, respectively.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||
| Non-interest Expense: | |||||||||||||||||||||||||||||||||||
| Compensation and related benefits | $ | 5,538 | $ | 5,295 | 4.59 | % | $ | 16,881 | $ | 14,605 | 15.58 | % | |||||||||||||||||||||||
| Occupancy | 993 | 905 | 9.72 | % | 2,898 | 2,725 | 6.35 | % | |||||||||||||||||||||||||||
| Office | 532 | 599 | (11.19) | % | 1,650 | 1,649 | 0.06 | % | |||||||||||||||||||||||||||
| Data processing | 1,145 | 1,092 | 4.85 | % | 3,165 | 2,953 | 7.18 | % | |||||||||||||||||||||||||||
| Amortization of intangible assets | 399 | 412 | (3.16) | % | 1,223 | 1,085 | 12.72 | % | |||||||||||||||||||||||||||
| Mortgage servicing rights expense | 603 | 325 | 85.54 | % | 2,330 | 822 | 183.45 | % | |||||||||||||||||||||||||||
| Advertising, marketing and public relations | 260 | 315 | (17.46) | % | 802 | 974 | (17.66) | % | |||||||||||||||||||||||||||
| FDIC premium assessment | 188 | 78 | 141.03 | % | 436 | 318 | 37.11 | % | |||||||||||||||||||||||||||
| Professional services | 434 | 561 | (22.64) | % | 1,391 | 1,961 | (29.07) | % | |||||||||||||||||||||||||||
| Gains on repossessed assets, net | (105) | (16) | (556.25) | % | (195) | (143) | (36.36) | % | |||||||||||||||||||||||||||
| Other | 737 | 3,409 | (78.38) | % | 2,266 | 5,309 | (57.32) | % | |||||||||||||||||||||||||||
| Total non-interest expense | $ | 10,724 | $ | 12,975 | (17.35) | % | $ | 32,847 | $ | 32,258 | 1.83 | % | |||||||||||||||||||||||
| Non-interest expense (annualized) / Average assets | 2.62 | % | 3.54 | % | (25.95) | % | 2.78 | % | 3.15 | % | (11.88) | % | |||||||||||||||||||||||
The growth in most line items for the nine months September 30 are due to the impact of the F&M acquisition on July 1, 2019.
Compensation expense, for the nine-month period ended September 30, 2020 was higher than the comparable prior year period due primarily to the impact of the F&M acquisition, and to a lesser extent, higher variable mortgage production compensation related to higher mortgage loan origination activity, primarily in the second and third quarter of 2020. Compensation expense for three months ended September 30, 2020 compared to September 30, 2019 was higher largely due to higher variable mortgage production compensation related to higher mortgage loan activity.
Data processing expense increases were due primarily to higher loan origination activity and larger deposit balances.
Mortgage servicing rights expense increased during the three and nine months ended September 30, 2020 by $278 and $1,508 respectively, compared to the comparable prior year periods. The Company recognized related impairment charges of $250 and $1,422 respectively in the three and nine-month periods ended September 30, 2020 compared to $100 and $210 for the three and nine months ended September 30, 2019, largely due to the impact of higher actual and forecasted prepayment rates. The remaining increase is due to higher amortization based on the current interest rate environment.
Professional services expenses were lower during the three months ended September 30, 2020 compared to the prior period due to merger costs in third quarter 2019. For the nine months ended September 30, 2020 compared to the comparable prior year periods, professional service expenses were lower primarily due to lower audit costs and third quarter 2019 acquisition costs. Higher 2019 audit costs were largely due to the transition period audit required due to the change in the Company’s fiscal year-end.
Other expenses for the three and nine-month period ended September 30, 2020 decreased compared to September 30, 2019, largely due to lower merger-related expenses.
Income Taxes. Income tax expense was $1,267 and $3,309 for the three and nine months ended September 30, 2020 compared to $430 and $2,252 for the three and nine months ended September 30, 2019. The impact of higher non-taxable municipal income in 2019 was offset by higher non-deductible merger costs, netting to approximately the same effective tax rates in both periods.
58
BALANCE SHEET ANALYSIS
Cash and Cash Equivalents. Cash and cash equivalents increased to $115.5 million at September 30, 2020 from $55.8 million at December 31, 2019. Deposit levels remain robust, while the Bank experienced loan growth primarily due to SBA PPP loan originations and chose to modestly shrink the investment portfolio due to current low yielding investment options. As such, the Company has chosen to maintain a higher level of liquidity.
Investment Securities. We manage our securities portfolio to provide liquidity and enhance income. Our investment portfolio is comprised of securities available for sale and securities held to maturity. In the first quarter, the Bank sold approximately $10.7 million of fixed-rate mortgage-backed certificates, (“MBS”) and these were replaced with similar, lower premium MBS.
Securities available for sale, which represent the majority of our investment portfolio, were $150.9 million at September 30, 2020, compared with $180.1 million at December 31, 2019. The reduction in the AFS portfolio is due to maturities and calls of U.S government agency obligations. The maturities and calls in the corporate asset-based securities in 2020 were replaced with bank holding company issued subordinated debt of which the Bank purchased $7.3 million in the third quarter.
Securities held to maturity increased to $16.9 million at September 30, 2020, compared to $2.9 million at December 31, 2019. This increase was due to the purchase of agency mortgage-backed securities in the first quarter and third quarter of 2020.
The amortized cost and market values of our available for sale securities by asset categories as of the dates indicated below were as follows:
| Securities available for sale | Amortized Cost | Fair Value | |||||||||
| September 30, 2020 | |||||||||||
| U.S. government agency obligations | $ | 34,059 | $ | 34,379 | |||||||
| Obligations of states and political subdivisions | 140 | 140 | |||||||||
| Mortgage-backed securities | 49,870 | 51,758 | |||||||||
| Corporate debt securities | 15,211 | 15,364 | |||||||||
| Corporate asset-based securities | 36,443 | 35,543 | |||||||||
| Trust preferred securities | 13,938 | 13,724 | |||||||||
| Totals | $ | 149,661 | $ | 150,908 | |||||||
| December 31, 2019 | |||||||||||
| U.S. government agency obligations | $ | 52,020 | $ | 51,805 | |||||||
| Obligations of states and political subdivisions | 281 | 281 | |||||||||
| Mortgage backed securities | 70,806 | 71,331 | |||||||||
| Corporate debt securities | 18,776 | 18,725 | |||||||||
| Corporate asset-based securities | 27,718 | 26,854 | |||||||||
| Trust preferred securities | 11,167 | 11,123 | |||||||||
| Totals | $ | 180,768 | $ | 180,119 | |||||||
59
The amortized cost and fair value of our held to maturity securities by asset categories as of the dates noted below were as follows:
| Securities held to maturity | Amortized Cost | Fair Value | |||||||||
| September 30, 2020 | |||||||||||
| Obligations of states and political subdivisions | $ | 300 | $ | 300 | |||||||
| Mortgage-backed securities | 16,627 | 16,933 | |||||||||
| Totals | $ | 16,927 | $ | 17,233 | |||||||
| December 31, 2019 | |||||||||||
| Obligations of states and political subdivisions | $ | 300 | $ | 302 | |||||||
| Mortgage-backed securities | 2,551 | 2,655 | |||||||||
| Totals | $ | 2,851 | $ | 2,957 | |||||||
The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Available for sale securities | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
| Agency | $ | 83,929 | $ | 86,135 | $ | 122,826 | $ | 123,136 | |||||||||||||||
| AAA | 11,185 | 10,885 | 4,383 | 4,245 | |||||||||||||||||||
| AA | 25,398 | 24,798 | 23,475 | 22,749 | |||||||||||||||||||
| A | 6,909 | 7,019 | 18,776 | 18,725 | |||||||||||||||||||
| BBB | 22,240 | 22,071 | 11,167 | 11,123 | |||||||||||||||||||
| Non-rated | — | — | 141 | 141 | |||||||||||||||||||
| Total available for sale securities | $ | 149,661 | $ | 150,908 | $ | 180,768 | $ | 180,119 | |||||||||||||||
The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Securities held to maturity | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
| U.S. government agency | $ | 16,627 | $ | 16,933 | $ | 2,551 | $ | 2,655 | |||||||||||||||
| AA | 125 | 125 | 125 | 126 | |||||||||||||||||||
| Non-rated | 175 | 175 | 175 | 176 | |||||||||||||||||||
| Total | $ | 16,927 | $ | 17,233 | $ | 2,851 | $ | 2,957 | |||||||||||||||
At September 30, 2020, securities with a market value of $1.3 million were pledged against a line of credit with the Federal Reserve Bank of Minneapolis. As of September 30, 2020, this line of credit had a zero-outstanding balance. At September 30, 2020, the Bank has pledged mortgage-backed securities with a market value of $3.9 million and U.S. government agency securities with a market value of $0.6 million as collateral against municipal deposits. At September 30, 2020, the Bank also has mortgage-backed securities with a carrying value of $0.5 million pledged as collateral to the Federal Home Loan Bank of Des Moines.
Loans. Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $53 million, to $1.23 billion as of September 30, 2020, from $1.18 billion at December 31, 2019. This growth was due to the impact of the growth in the SBA PPP origination of $139.2 million, partially offset by the net remaining deferred origination fees of $4.0 million. This growth was partially offset by a reduction in acquired commercial loans and originated loan portfolio. In addition, residential mortgage loans and indirect consumer loans of $36.4 million and $11.0 million, respectively, decreased. The following table reflects the composition, or mix of our loan portfolio at September 30, 2020 and December 31, 2019:
60
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Amount | Amount | |||||||||||||
| Real estate loans: | ||||||||||||||
| Commercial/agricultural real estate | ||||||||||||||
| Commercial real estate | $ | 500,673 | $ | 514,459 | ||||||||||
| Agricultural real estate | 73,143 | 85,363 | ||||||||||||
| Multi-family real estate | 109,668 | 87,008 | ||||||||||||
| Construction and land development | 89,338 | 86,410 | ||||||||||||
| Residential mortgage | ||||||||||||||
| Residential mortgage | 141,854 | 176,332 | ||||||||||||
| Purchased HELOC loans | 6,547 | 8,407 | ||||||||||||
| Total real estate loans | 921,223 | 957,979 | ||||||||||||
| C&I/Agricultural operating and Consumer Installment Loans: | ||||||||||||||
| C&I/Agricultural operating | ||||||||||||||
| Commercial and industrial (“C&I”) | 104,372 | 133,734 | ||||||||||||
| Agricultural operating | 33,958 | 37,780 | ||||||||||||
| Consumer installment | ||||||||||||||
| Originated indirect paper | 28,535 | 39,585 | ||||||||||||
| Other Consumer | 14,630 | 18,186 | ||||||||||||
| Total C&I/Agricultural operating and Consumer installment Loans | 181,495 | 229,285 | ||||||||||||
| Gross loans before C&I SBA PPP loans | 1,102,718 | 1,187,264 | ||||||||||||
| SBA PPP loans | 139,166 | — | ||||||||||||
| Gross loans | $ | 1,241,884 | $ | 1,187,264 | ||||||||||
| Unearned net deferred fees and costs and loans in process | (5,033) | (393) | ||||||||||||
| Unamortized discount on acquired loans | (6,712) | (9,491) | ||||||||||||
| Total loans (net of unearned income and deferred expense) | 1,230,139 | 1,177,380 | ||||||||||||
| Allowance for loan losses | (14,836) | (10,320) | ||||||||||||
| Total loans receivable, net | $ | 1,215,303 | $ | 1,167,060 | ||||||||||
Allowance for Loan Losses. The loan portfolio is our primary asset subject to credit risk. To address this credit risk, we maintain an ALL for probable and inherent credit losses through periodic charges to our earnings. These charges are shown in our consolidated statements of operations as PLL. See “Provision for Loan Losses” earlier in this quarterly report. We attempt to control, monitor and minimize credit risk through the use of prudent lending standards, a thorough review of potential borrowers prior to lending and ongoing and timely review of payment performance. Asset quality administration, including early identification of loans performing in a substandard manner, as well as timely and active resolution of problems, further enhances management of credit risk and minimization of loan losses. Any losses that occur and that are charged off against the ALL are periodically reviewed with specific efforts focused on achieving maximum recovery of both principal and interest.
At least quarterly, we review the adequacy of the ALL. Based on an estimate computed pursuant to the requirements of ASC 450-10, “Accounting for Contingencies” and ASC 310-10, “Accounting by Creditors for Impairment of a Loan”, the analysis of the ALL consists of three components: (i) specific credit allocation established for expected losses relating to specific impaired loans for which the recorded investment in the loan exceeds its fair value; (ii) general portfolio allocation based on historical loan loss experience for significant loan categories; and (iii) general portfolio allocation based on qualitative factors such as economic conditions and other relevant factors specific to the markets in which we operate. We continue to refine our ALL methodology by introducing a greater level of granularity to our loan portfolio. We currently segregate loans into pools based on common risk characteristics for purposes of determining the ALL. The additional segmentation of the portfolio is intended to provide a more effective basis for the determination of qualitative factors affecting our ALL. In addition, management continually evaluates our ALL methodology to assess whether modifications in our methodology are appropriate in light of underwriting practices, market conditions, identifiable trends, regulatory pronouncements or other factors. We
61
believe that any modifications or changes to the ALL methodology would be to enhance the ALL. However, any such modifications could result in materially different ALL levels in future periods.
The specific credit allocation for the ALL is based on a regular analysis of all loans that are considered impaired. In compliance with ASC 310-10, the fair value of the loan is determined based on either the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less the expected cost of sale for such collateral. At September 30, 2020, the Company had identified impaired loans of $51.7 million, consisting of $19.8 million TDR loans, the carrying amount of purchased credit impaired loans of $23.4 million and $8.5 million of substandard non-TDR loans. The $51.7 million total of impaired loans includes $12.6 million of performing TDR loans. At December 31, 2019, the Company had identified impaired loans of $63.2 million, consisting of $12.6 million TDR loans, the carrying amount of purchased credit impaired loans of $32.0 million and $18.6 million of substandard non-TDR loans. The $63.2 million total of impaired loans includes $5.4 million of performing TDR loans. At September 30, 2020 and December 31, 2019, we had 342 and 389 such impaired loans, respectively, all secured by real estate or personal property. Of the impaired loans, there were 19 individual loans where estimated fair value was less than their book value (i.e. we deemed impairment to exist) totaling $5.3 million for which $1.2 million in specific ALL was recorded as of September 30, 2020.
The allowance for loan and losses increased to $14.8 million at September 30, 2020 representing 1.21% of loans receivable, less the 100% SBA guaranteed PPP loans. A significant portion of the current loan portfolio includes loans purchased through whole bank acquisitions in recent years resulting in purchased credit impairments which are not included in the allowance for loan losses. The Allowance for loan losses was $10.3 million at December 31, 2019, representing 0.88% of loans receivable. The increase in the allowance was due to loan growth, increases in unallocated, increases in specific reserves on impaired loans and continued anticipation of pandemic-related adverse economic impacts, including various “Stay-at-Home Orders” which continued to result in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain businesses, including bank borrowers.
Allowance for Loan Losses to Loans, net of SBA PPP Loans
(in thousands, except ratios)
| September 30, 2020 | June 30, 2020 | December 31, 2019 | September 30, 2019 | |||||||||||||||||||||||
| Loans, end of period | $ | 1,230,139 | $ | 1,281,175 | $ | 1,177,380 | $ | 1,134,708 | ||||||||||||||||||
| SBA PPP loans, net of deferred fees | (135,177) | (132,800) | — | — | ||||||||||||||||||||||
| Loans, net of SBA PPP loans and deferred fees | $ | 1,094,962 | $ | 1,148,375 | $ | 1,177,380 | $ | 1,134,708 | ||||||||||||||||||
| Allowance for loan losses | $ | 14,836 | $ | 13,373 | $ | 10,320 | $ | 9,177 | ||||||||||||||||||
| ALL to loans net of SBA PPP loans and deferred fees | 1.35 | % | 1.16 | % | 0.88 | % | 0.81 | % | ||||||||||||||||||
| ALL to loans, end of period | 1.21 | % | 1.04 | % | 0.88 | % | 0.81 | % | ||||||||||||||||||
All of the nine factors identified in the FFIEC’s Interagency Policy Statement on the Allowance for Loan and Lease Losses are taken into account in determining the ALL. The impact of the factors in general categories are subject to change; thus, the allocations are management’s estimate of the loan loss categories in which the probable and inherent loss has occurred as of the date of our assessment. Of the nine factors, we believe the following have the greatest impact on our customers’ ability to repay loans and our ability to recover potential losses through collateral sales: (1) lending policies and procedures; (2) economic and business conditions; and (3) the value of the underlying collateral. As loan balances and estimated losses in a particular loan type decrease or increase and as the factors and resulting allocations are monitored by management, changes in the risk profile of the various parts of the loan portfolio may be reflected in the allocated allowance. The general component covers non-impaired loans and is based on historical loss experience adjusted for these and other qualitative factors. In addition, management continues to refine the ALL estimation process as new information becomes available. These refinements could also cause increases or decreases in the ALL. See Provision for loan losses in the Consolidated Statements of Operations (unaudited) for further details. The unallocated portion of the ALL is intended to account for imprecision in the estimation process or relevant current information that may not have been considered in the process.
62
Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of nonaccrual and problem loans in order to minimize the Bank’s risk of loss. Nonperforming loans are defined as nonaccrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted. The accrual of interest income is discontinued on our loans according to the following schedule:
•Commercial/agricultural real estate loans, past due 90 days or more;
•C&I/Agricultural operating loans, past due 90 days or more;
•Closed ended consumer installment loans past due 120 days or more; and
•Residential mortgage loans and open-ended consumer installment loans past due 180 days or more.
When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income. A TDR typically involves the granting of some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes. TDR loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.
63
The following table identifies the various components of nonperforming assets and other balance sheet information as of the dates indicated below and changes in the ALL for the periods then ended:
| September 30, 2020 and Nine Months Then Ended | December 31, 2019 and Twelve Months Then Ended | ||||||||||
| Nonperforming assets: | |||||||||||
| Nonaccrual loans | |||||||||||
| Commercial real estate | $ | 2,762 | $ | 5,705 | |||||||
| Agricultural real estate | 5,252 | 7,568 | |||||||||
| Commercial and industrial | 853 | 1,850 | |||||||||
| Agricultural operating | 1,651 | 1,702 | |||||||||
| Residential mortgage | 2,536 | 2,063 | |||||||||
| Consumer installment | 100 | 168 | |||||||||
| Total nonaccrual loans | $ | 13,154 | $ | 19,056 | |||||||
| Accruing loans past due 90 days or more | 950 | 1,104 | |||||||||
| Total nonperforming loans (“NPLs”) | 14,104 | 20,160 | |||||||||
| Other real estate owned | 756 | 1,429 | |||||||||
| Other collateral owned | 56 | 31 | |||||||||
| Total nonperforming assets (“NPAs”) | $ | 14,916 | $ | 21,620 | |||||||
| Troubled Debt Restructurings (“TDRs”) | $ | 19,778 | $ | 12,594 | |||||||
| Accruing TDR's | $ | 12,579 | $ | 5,396 | |||||||
| Nonaccrual TDRs | $ | 7,199 | $ | 7,198 | |||||||
| Average outstanding loan balance | $ | 1,232,678 | $ | 1,074,952 | |||||||
| Loans, end of period | $ | 1,230,139 | $ | 1,177,380 | |||||||
| Total assets, end of period | $ | 1,622,593 | $ | 1,531,249 | |||||||
| ALL, at beginning of period | $ | 10,320 | $ | 7,604 | |||||||
| Loans charged off: | |||||||||||
| Commercial/Agricultural real estate | — | (381) | |||||||||
| C&I/Agricultural operating | (791) | — | |||||||||
| Residential mortgage | (78) | (239) | |||||||||
| Consumer installment | (126) | (291) | |||||||||
| Total loans charged off | (995) | (911) | |||||||||
| Recoveries of loans previously charged off: | |||||||||||
| Commercial/Agricultural real estate | 149 | 3 | |||||||||
| C&I/Agricultural operating | 33 | 1 | |||||||||
| Residential mortgage | 20 | 5 | |||||||||
| Consumer installment | 59 | 93 | |||||||||
| Total recoveries of loans previously charged off: | 261 | 102 | |||||||||
| Net loans charged off (“NCOs”) | (734) | (809) | |||||||||
| Additions to ALL via provision for loan losses charged to operations | 5,250 | 3,525 | |||||||||
| ALL, at end of period | $ | 14,836 | $ | 10,320 | |||||||
| Ratios: | |||||||||||
| ALL to NCOs (annualized) | 1,515.94 | % | 1,275.65 | % | |||||||
| NCOs (annualized) to average loans | 0.08 | % | 0.08 | % | |||||||
| ALL to total loans | 1.21 | % | 0.88 | % | |||||||
| NPLs to total loans | 1.15 | % | 1.71 | % | |||||||
| NPAs to total assets | 0.92 | % | 1.41 | % | |||||||
64
The following table shows the detail of non-performing assets by originated and acquired portfolios.
Nonperforming Originated / Acquired Assets
(in thousands, except ratios)
| September 30, 2020 and Three Months Ended | December 31, 2019 and Three Months Ended | September 30, 2019 and Three Months Ended | ||||||||||||||||||
| Nonperforming assets: | ||||||||||||||||||||
| Originated nonperforming assets: | ||||||||||||||||||||
| Nonaccrual loans | $ | 3,255 | $ | 4,285 | $ | 4,816 | ||||||||||||||
| Accruing loans past due 90 days or more | 698 | 946 | 842 | |||||||||||||||||
| Total originated nonperforming loans (“NPL”) | 3,953 | 5,231 | 5,658 | |||||||||||||||||
| Other real estate owned (“OREO”) | 352 | 441 | 195 | |||||||||||||||||
| Other collateral owned | 56 | 28 | 25 | |||||||||||||||||
| Total originated nonperforming assets (“NPAs”) | $ | 4,361 | $ | 5,700 | $ | 5,878 | ||||||||||||||
| Acquired nonperforming assets: | ||||||||||||||||||||
| Nonaccrual loans | $ | 9,899 | $ | 14,771 | $ | 14,206 | ||||||||||||||
| Accruing loans past due 90 days or more | 252 | 158 | 257 | |||||||||||||||||
| Total acquired nonperforming loans (“NPL”) | 10,151 | 14,929 | 14,463 | |||||||||||||||||
| Other real estate owned (“OREO”) | 404 | 988 | 1,153 | |||||||||||||||||
| Other collateral owned | — | 3 | — | |||||||||||||||||
| Total acquired nonperforming assets (“NPAs”) | $ | 10,555 | $ | 15,920 | $ | 15,616 | ||||||||||||||
| Total nonperforming assets (“NPAs”) | $ | 14,916 | $ | 21,620 | $ | 21,494 | ||||||||||||||
| Loans, end of period | $ | 1,230,139 | $ | 1,177,380 | $ | 1,124,378 | ||||||||||||||
| Total assets, end of period | $ | 1,622,593 | $ | 1,531,249 | $ | 1,475,364 | ||||||||||||||
| Ratios: | ||||||||||||||||||||
| Originated NPLs to total loans | 0.32 | % | 0.44 | % | 0.50 | % | ||||||||||||||
| Acquired NPLs to total loans | 0.83 | % | 1.27 | % | 1.29 | % | ||||||||||||||
| Originated NPAs to total assets | 0.27 | % | 0.37 | % | 0.40 | % | ||||||||||||||
| Acquired NPAs to total assets | 0.65 | % | 1.04 | % | 1.06 | % | ||||||||||||||
Nonperforming assets decreased by $6.7 million to $14.9 million at September 30, 2020 from December 31, 2019. This decrease is largely due to reductions in acquired non-performing loans. Part of this reduction, included the return to accrual status of nonaccrual acquired loans totaling $1.7 million in the second quarter of 2020, based on their current payment status and history and in accordance with the Bank’s policy. Refer to the “Allowance for Loan Losses” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information related to nonperforming loans.
65
Nonaccrual Loans Roll forward:
| Quarter Ended | |||||||||||||||||||||||||||||
| September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | |||||||||||||||||||||||||
| Balance, beginning of period | $ | 14,787 | $ | 16,090 | $ | 19,056 | $ | 19,022 | $ | 13,612 | |||||||||||||||||||
| Additions | 716 | 1,907 | 1,811 | 2,641 | 1,493 | ||||||||||||||||||||||||
| Acquired nonaccrual loans | — | — | — | — | 5,898 | ||||||||||||||||||||||||
| Charge offs | (141) | (175) | (452) | (198) | (134) | ||||||||||||||||||||||||
| Transfers to OREO | (172) | — | (1,100) | (425) | (209) | ||||||||||||||||||||||||
| Return to accrual status | (165) | (1,702) | (120) | (14) | (53) | ||||||||||||||||||||||||
| Payments received | (1,744) | (1,292) | (2,887) | (1,957) | (1,539) | ||||||||||||||||||||||||
| Other, net | (127) | (41) | (218) | (13) | (46) | ||||||||||||||||||||||||
| Balance, end of period | $ | 13,154 | $ | 14,787 | $ | 16,090 | $ | 19,056 | $ | 19,022 | |||||||||||||||||||
Nonaccrual TDR loans remained at $7.2 million at both September 30, 2020 and December 31, 2019.
| September 30, 2020 | December 31, 2019 | September 30, 2019 | |||||||||||||||||||||||||||||||||
| Number of Modifications | Recorded Investment | Number of Modifications | Recorded Investment | Number of Modifications | Recorded Investment | ||||||||||||||||||||||||||||||
| Troubled debt restructurings: Accrual Status | |||||||||||||||||||||||||||||||||||
| Commercial/Agricultural real estate | 19 | $ | 5,480 | 14 | $ | 1,730 | 14 | $ | 2,202 | ||||||||||||||||||||||||||
| C&I/Agricultural operating | 5 | 3,868 | 2 | 366 | 4 | 478 | |||||||||||||||||||||||||||||
| Residential mortgage | 42 | 3,178 | 40 | 3,233 | 39 | 3,137 | |||||||||||||||||||||||||||||
| Consumer installment | 7 | 53 | 7 | 67 | 11 | 82 | |||||||||||||||||||||||||||||
| Total loans | 73 | $ | 12,579 | 63 | $ | 5,396 | 68 | $ | 5,899 | ||||||||||||||||||||||||||
Classified assets decreased to $32.9 million at September 30, 2020, from $39.9 million at December 31, 2019 largely due to the reduction in nonperforming assets discussed above, with a modest increase in newly classified assets. Nonperforming assets decreased to $14.9 million or 0.92% of total assets at September 30, 2020 compared to $21.6 million or 1.41% of total assets at December 31, 2019. Included in nonperforming assets at September 30, 2020 are $10.6 million of nonperforming assets acquired during recent whole-bank acquisitions.
The table below shows a summary of the decrease in substandard loans by quarter since the first impact of the F&M acquisition on September 30, 2019 levels. While special mention loans increased in the first quarter of 2020 and more modestly in the second quarter of 2020, the balances decreased in the third quarter of 2020 due to resolution. See Note 3, “Loans, Allowance for Loan Losses and Impaired Loans” for additional information.
| (in thousands) | ||||||||||||||||||||||||||||||||
| September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | ||||||||||||||||||||||||||||
| Special mention loan balances | $ | 7,777 | $ | 19,958 | $ | 19,387 | $ | 10,856 | $ | 12,959 | ||||||||||||||||||||||
| Substandard loan balances | 32,922 | 35,911 | 38,393 | 39,892 | 38,527 | |||||||||||||||||||||||||||
| Criticized loans, end of period | $ | 40,699 | $ | 55,869 | $ | 57,780 | $ | 50,748 | $ | 51,486 | ||||||||||||||||||||||
Hotels and restaurants represent our portfolio’s two industry sectors most directly and adversely affected by the recent pandemic and related government actions. These sector loans totaled approximately $102 million and $39 million, respectively at September 30, 2020. The weighted-average loan-to-value percentage and debt service coverage ratio on these hotel industry sector loans was 58% and 2.2 times. Approximately $18 million of restaurant sector loans are to franchise quick-service restaurants.
66
As of September 30, 2020, the Bank had $126.7 million of loan modifications remaining due to pandemic-related borrower requests. Approximately $50 million of modifications are scheduled to resume their regular principal and interest payments in the fourth quarter. Hotel industry sector loans represent approximately $70 million of the approved deferrals projected at December 31, 2020. Of these, $48 million represent a second deferral under the CARES ACT, with the customer making an interest only payment and the Bank generally receives the reserve accounts pledge. While the Company has no indication that any of the modified credits are specifically impaired, additional risk and uncertainty inherent in the current pandemic-affected environment has been considered. See “Allowance for Loan Losses” section above for discussion of pandemic-related qualitative factor, and related provision for loan losses.
The table below shows the changes in the Bank’s non-accretable difference on purchased credit impaired loans. Payoffs of purchased credit impaired loans, including selected nonaccrual loans discussed above resulted in associated non-accretable differences being realized as interest income as shown below. The Bank has transferred non-accretable difference on purchased credit impaired loans to accretable loan discount as collateral coverage improved sufficiently, due to a combination of principal paydowns and/or improving collateral positions. This transferred accretion is accreted over the remaining contractual term of the loan or until payoff, whichever is shorter.
Non-accretable Difference:
| (in thousands) | ||||||||||||||||||||||||||||||||
| September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | ||||||||||||||||||||||||||||
| Non-accretable difference, beginning of period | $ | 3,355 | $ | 4,327 | $ | 6,290 | $ | 6,737 | $ | 3,889 | ||||||||||||||||||||||
| Additions to non-accretable difference for acquired purchased credit impaired loans | — | — | — | (170) | 2,898 | |||||||||||||||||||||||||||
| Non-accretable difference realized as interest from payoffs of purchased credit impaired loans | (130) | (196) | (1,043) | (271) | (50) | |||||||||||||||||||||||||||
| Transfers from non-accretable difference to accretable discount. | (1,294) | (741) | (669) | — | — | |||||||||||||||||||||||||||
| Non-accretable difference used to reduce loan principal balance | (270) | (35) | — | — | — | |||||||||||||||||||||||||||
| Non-accretable difference transferred to OREO due to loan foreclosure | — | — | (251) | (6) | — | |||||||||||||||||||||||||||
| Non-accretable difference, end of period | $ | 1,661 | $ | 3,355 | $ | 4,327 | $ | 6,290 | $ | 6,737 | ||||||||||||||||||||||
Mortgage Servicing Rights. Mortgage servicing rights (“MSR”) assets are initially measured at fair value; assessed at least quarterly for impairment; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations. The valuation of MSRs and related amortization thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.
The fair market value of the Company’s MSR asset decreased from $4.3 million at December 31, 2019 to $3.5 million at September 30, 2020, primarily due to $1.4 million of impairment recorded on the MSR asset due to the impact of higher prepayment activity and partially offset by increased capitalized servicing on newly sold mortgage originations. The unpaid balances of one- to four-family residential real estate loans serviced for others as of September 30, 2020 and December 31, 2019 were $555.7 million and $524.7 million, respectively. The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at September 30, 2020 and December 31, 2019 was 0.63% and 0.82%, respectively.
Deposits. Deposits increased $75.0 million to $1.271 billion at September 30, 2020, from $1.196 billion at December 31, 2019. The strong non-maturity deposit growth allowed the Company to reduce reliance on higher cost brokered and institutional deposits. This planned reduction in brokered and institutional deposits resulted in a reduction to $3.3 million at September 30, 2020 from $50.4 million at December 31, 2019. Additionally, retail certificates of deposit decreased by $28 million as the Company chose not to match higher rate local retail certificate competition.
67
The following is a summary of deposits by type at September 30, 2020 and December 31, 2019, respectively:
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Non-interest bearing demand deposits | $ | 229,217 | $ | 168,157 | ||||||||||
| Interest bearing demand deposits | 279,648 | 223,102 | ||||||||||||
| Savings accounts | 191,511 | 156,599 | ||||||||||||
| Money market accounts | 246,651 | 246,430 | ||||||||||||
| Certificate accounts | 323,751 | 401,414 | ||||||||||||
| Total deposits | $ | 1,270,778 | $ | 1,195,702 | ||||||||||
Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings. FHLB advances were $124.5 million as of September 30, 2020 and $131.0 million as of December 31, 2019, as we continue to utilize these advances, as necessary, to supplement core deposits to meet our funding and liquidity needs, and as we evaluate all options to manage the Bank’s cost of funds. The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank. This irrevocable standby letter of credit (“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest-bearing deposit balances. The Bank’s current unused borrowing capacity, supported by loan collateral as of September 30, 2020 is approximately $105.9 million.
In the quarter ended June 30, the Bank’s origination of SBA PPP loans allowed the Bank to gain access to the Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“PPPLF”), whereby the Bank can pledged SBA PPP loans, by day of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut. The Bank borrowed twice under this facility in the second quarter of 2020. Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowings under this facility at June 30, 2020 or at any time during the quarter ending September 30, 2020. The Bank could borrow $139.2 million under this facility in 2020.
During the first quarter of 2020, the Bank added $12.5 million of 10-year maturity advances that can be called or replaced by the FHLB on a quarterly basis, beginning approximately three months from the initial advance. At September 30, 2020 and December 31, 2019, the Bank had $55 million and $42.5 million, respectively, of these 10-year, three-month callable advances.
In the first quarter of 2020, the Bank extended overnight advances with $5 million maturing in each quarter of 2023 and 2024, and $5 million maturing in the first quarter of 2025. See Note 7, “Federal Home Loan Bank and Federal Reserve Bank Advances and Other Borrowings” for more information.
At September 30, 2020, the Bank has pledged $682.0 million of loans to secure the current FHLB outstanding advances, letters of credit and to provide the unused borrowing capacity compared to $792.9 million of loans pledged at December 31, 2019.
In August 2020, the Company issued ten-year, 6% fixed to floating subordinated notes totaling $15 million. The notes have a five-year non-call feature.
Stockholders’ Equity. Total stockholders’ equity increased to $157.3 million at September 30, 2020 from $150.6 million at December 31, 2019, largely due to net income of $9.2 million. This increase was offset by the annual cash dividend paid to common stockholders of $2.4 million during the first quarter of 2020. Additionally, during the first quarter, the Company repurchased 156,000 shares of its common stock at a cost of $1.8 million under the Company’s stock buyback authorization. On March 20, 2020, the Company announced the Board of Directors had suspended this stock buyback authorization and on July 27, 2020, the Board of Directors terminated the stock buyback authorization, which was previously scheduled to expire on September 30, 2020.
Liquidity and Asset / Liability Management. Our primary sources of funds are deposits; amortization, prepayments and maturities of outstanding loans; short-term investments; and borrowings. We use our sources of funds primarily to meet ongoing commitments, to pay non-renewing, maturing certificates of deposit and savings withdrawals, and to fund loan commitments. We have enhanced our liquidity monitoring and updated what we consider to be sources of on-balance sheet cash. We consider our interest-bearing cash and unpledged investment securities to be our sources of on-balance sheet liquidity. At September 30, 2020, our on-balance sheet liquidity ratio was 16.2%. While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are influenced by factors partially outside of the Bank’s control, including general interest rates, economic conditions and competition. Although $216.9 million of our $323.8 million (67%) CD portfolio as of September 30, 2020 will mature within the next 12 months, we have historically retained a majority of our maturing CD’s. However, due to strategic pricing decisions
68
regarding rate matching and branch closures, our retention rate may decrease in the future. Through new deposit product offerings to our branch and commercial customers, we are currently attempting to strengthen customer relationships to attract additional non-rate sensitive deposits. In our present interest rate environment, and based on maturing yields, this is intended to also reduce our cost of funds.
We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank and correspondent banks We utilize FHLB borrowings to leverage our capital base, to provide funds for our lending and investment activities, and to manage our interest rate risk. Our borrowing arrangement with the FHLB calls for pledging certain qualified real estate loans and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets. As of September 30, 2020, we had approximately $105.9 million available under this arrangement, supported by loan collateral, as compared to $203.9 million at December 31, 2019. In the quarter ended June 30, 2020, the Bank’s origination of SBA PPP loans allowed the Bank to gain access to the Federal Reserve’s PPPLF facility, whereby the Bank can pledge SBA PPP loans, by day of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut. Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowing under this facility at June 30, 2020 or at any time during the quarter ended September 30, 2020. The Bank could borrow $139.2 million under this facility at September 30, 2020. As the SBA PPP loans are forgiven, the collateral will reduce and our borrowing capacity under this facility will be reduced.
We maintain a line of credit with the Federal Reserve Bank which has a $1.0 million capacity, based on our current pledged collateral position. Additionally, we have $25.0 million of uncommitted federal funds purchased lines of credit, as well as a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.
In reviewing our adequacy of liquidity, we review and evaluate historical financial information, including information regarding general economic conditions, current ratios, management goals and the resources available to meet our anticipated liquidity needs. Management believes that our liquidity is adequate, and, to management’s knowledge, there are no known events or uncertainties that will result or are likely to reasonably result in a material increase or decrease in our liquidity.
Off-Balance Sheet Liabilities. Some of our financial instruments have off-balance sheet risk. These instruments include unused commitments for lines of credit, overdraft protection lines of credit and home equity lines of credit, as well as commitments to extend credit. As of September 30, 2020, the Company had $260.8 million in unused commitments, compared to $246.7 million in unused commitments as of December 31, 2019.
Capital Resources. As of September 30, 2020, as shown in the table below, the Bank’s Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions.
69
Below are the amounts and ratios for our capital levels as of the dates noted below for the Bank.
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2020 (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total capital (to risk weighted assets) | $ | 170,610 | 15.0 | % | $ | 91,021 | > = | 8.0 | % | $ | 113,776 | > = | 10.0 | % | |||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 156,388 | 13.7 | % | 68,266 | > = | 6.0 | % | 91,021 | > = | 8.0 | % | ||||||||||||||||||||||||||||||||||||
| Common equity tier 1 capital (to risk weighted assets) | 156,388 | 13.7 | % | 51,199 | > = | 4.5 | % | 73,955 | > = | 6.5 | % | ||||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to adjusted total assets) | 156,388 | 9.9 | % | 63,465 | > = | 4.0 | % | 79,331 | > = | 5.0 | % | ||||||||||||||||||||||||||||||||||||
| As of December 31, 2019 (Audited) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total capital (to risk weighted assets) | $ | 160,302 | 13.1 | % | $ | 98,174 | > = | 8.0 | % | $ | 122,718 | > = | 10.0 | % | |||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 149,982 | 12.2 | % | 73,631 | > = | 6.0 | % | 98,174 | > = | 8.0 | % | ||||||||||||||||||||||||||||||||||||
| Common equity tier 1 capital (to risk weighted assets) | 149,982 | 12.2 | % | 55,223 | > = | 4.5 | % | 79,767 | > = | 6.5 | % | ||||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to adjusted total assets) | 149,982 | 10.4 | % | 57,834 | > = | 4.0 | % | 72,293 | > = | 5.0 | % | ||||||||||||||||||||||||||||||||||||
At September 30, 2020, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.
70
Below are the amounts and ratios for our capital levels as of the dates noted below for the Company.
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2020 (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total capital (to risk weighted assets) | $ | 163,250 | 14.3 | % | $ | 91,021 | > = | 8.0 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 119,028 | 10.5 | % | 68,266 | > = | 6.0 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||||
| Common equity tier 1 capital (to risk weighted assets) | 119,028 | 10.5 | % | 51,199 | > = | 4.5 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to adjusted total assets) | 119,028 | 7.5 | % | 63,465 | > = | 4.0 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||||
| As of December 31, 2019 (Audited) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total capital (to risk weighted assets) | $ | 137,259 | 11.2 | % | $ | 98,174 | > = | 8.0 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 111,939 | 9.1 | % | 73,631 | > = | 6.0 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||||
| Common equity tier 1 capital (to risk weighted assets) | 111,939 | 9.1 | % | 55,223 | > = | 4.5 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to adjusted total assets) | 111,939 | 7.7 | % | 57,834 | > = | 4.0 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||||
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time and are not predictable or controllable. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. Like other financial institutions, our interest income and interest expense are affected by general economic conditions and policies of regulatory authorities, including the monetary policies of the Federal Reserve. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk through several means including through the use of third party reporting software. In monitoring interest rate risk we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensitivity to actual or potential changes in market interest rates.
In order to manage the potential for adverse effects of material and prolonged increases in interest rates on our results of operations, we adopted asset and liability management policies to better align the maturities and re-pricing terms of our interest earning assets and interest bearing liabilities. These policies are implemented by our Asset and Liability Management Committee (ALCO). The ALCO is comprised of members of the Bank’s senior management and Board of Directors. The ALCO establishes guidelines for and monitors the volume and mix of our assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The Committee’s objectives are to manage assets and funding sources to produce results that are consistent with liquidity, cash flow, capital adequacy, growth, risk and profitability goals for the Bank. The ALCO meets on a regularly scheduled basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis. At each meeting, the Committee recommends strategy changes, as appropriate, based on this review. The Committee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Bank’s Board of Directors on a regularly scheduled basis.
71
In order to manage our assets and liabilities and achieve desired levels of liquidity, credit quality, cash flow, interest rate risk, profitability and capital targets, we have focused our strategies on:
•originating shorter-term secured commercial, agricultural and consumer loan maturities;
•originating variable rate commercial and agricultural loans;
•managing our exposure to changes in interest rates, including, but not limited to the sale of longer-term fixed-rate residential loans in the secondary market with retained servicing;
•originating balloon mortgage loans with a term of five years or less to minimize the impact of sudden rate changes;
•managing our funding needs by utilizing core deposits, brokered certificates of deposits and borrowings as appropriate to extend terms and lock in fixed interest rates;
•reducing non-interest expense and managing our efficiency ratio by implementing technologies to enhance customer service and increase employee productivity; and
•realigning supervision and control of our branch network by modifying their configuration, staffing, locations and reporting structure to focus resources on our most productive markets.
At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the ALCO may determine to increase the Bank’s interest rate risk position somewhat in order to maintain or improve its net interest margin.
The following table sets forth, at September 30, 2020 and December 31, 2019 an analysis of our interest rate risk as measured by the estimated changes in Economic Value of Equity (“EVE”) resulting from an immediate and permanent shift in the yield curve (up 300 basis points and down 100 basis points). As of September 30, 2020 and December 31, 2019, due to the current level of interest rates, EVE estimates for decreases in interest rates greater than 100 basis points are not meaningful.
| Percent Change in Economic Value of Equity (EVE) | ||||||||||||||
| Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1) | At September 30, 2020 | At December 31, 2019 | ||||||||||||
| +300 bp | 7 | % | 1 | % | ||||||||||
| +200 bp | 4 | % | 2 | % | ||||||||||
| +100 bp | 1 | % | 1 | % | ||||||||||
| -100 bp | 11 | % | (2) | % | ||||||||||
(1)Assumes an immediate and parallel shift in the yield curve at all maturities.
Our overall interest rate sensitivity is demonstrated by net interest income shock analysis which measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of change in our net interest income over the next 12 months in the event of an immediate and parallel shift in the yield curve (up 300 basis points and down 100 basis points). The table below presents our projected change in net interest income for the various rate shock levels at September 30, 2020 and December 31, 2019.
| Percent Change in Net Interest Income Over One Year Horizon | ||||||||||||||
| Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1) | At September 30, 2020 | At December 31, 2019 | ||||||||||||
| +300 bp | 4 | % | (5) | % | ||||||||||
| +200 bp | 3 | % | (4) | % | ||||||||||
| +100 bp | 1 | % | (2) | % | ||||||||||
| -100 bp | — | % | 1 | % | ||||||||||
(1)Assumes an immediate and parallel shift in the yield curve at all maturities.
Note: The table above may not be indicative of future results.
The assumptions used to measure and assess interest rate risk include interest rates, loan prepayment rates, deposit decay (runoff) rates, and the market values of certain assets under differing interest rate scenarios. Actual values may differ from those projections set forth above should market conditions vary from the assumptions used in preparing the analysis. Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates.
72
ITEM 4.CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives. We carried out an evaluation as of September 30, 2020, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020 at reaching a level of reasonable assurance.
There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. On July 1, 2019, we completed our acquisition of F&M. In accordance with our integration efforts, we plan to incorporate F&M’s operations into our internal control over financial reporting structure within the time frame provided by applicable SEC rules and regulations.
PART II – OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS
In the normal course of business, the Company and/or the Bank occasionally become involved in other various legal proceedings. In our opinion, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.
73
Item 1A.RISK FACTORS
The Company is providing the disclosure below and supplementing the risk factors described in “Risk Factors” in Item 1A of our 2019 10-K and Item 1A of our Forms 10-Q for the quarters ended March 31, 2020 and June 30, 2020 with the risk factors set forth below. The information in this Form 10-Q should be read in conjunction with the risk factors described on our 2019 10-K and the information under “Forward-Looking Statements” in this Form 10-Q and in our 2019 10-K.
Our business may be adversely affected by conditions in the financial markets and economic conditions generally. We operate primarily in the Wisconsin and Minnesota markets. As a result, our financial condition, results of operations and cash flows are significantly impacted by changes in the economic conditions in those areas. In addition, our business is susceptible to broader economic trends within the United States economy. Economic conditions have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, tariffs, unemployment, changes in securities markets, changes in housing market prices, geopolitical uncertainties, natural disasters, pandemics and election outcomes or other factors could impact economic conditions and, in turn, could have a material adverse effect on our financial condition and results of operations.
In particular, the COVID-19 (also referred to as novel coronavirus) outbreak, which has been declared a global pandemic by the World Health Organization, has significantly and negatively impacted financial markets and economic conditions in our markets, the United States and globally. Recently, Minnesota and Wisconsin have been experiencing an increase in COVID-19 cases, which could further impact conditions in our markets. As a result, consumer confidence and consumer credit factors have been, and may be further, negatively impacted. Consequently, our business, financial condition and results of operations has been and could be further significantly and adversely affected. See also “The COVID-19 pandemic could have an adverse impact on our financial condition and our results of operations and other aspects of our business.”
We are subject to interest rate risk. Through our banking subsidiary, the Bank, our profitability depends in large part on our net interest income, which is the difference between interest earned from interest-earning assets, such as loans and mortgage-backed securities, and interest paid on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increase faster than the interest earned on loans and investments. As a result of the economic impacts of the COVID-19 pandemic, interest rates in the United States have been reduced, and may be even further reduced. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time due to many factors that are beyond our control, including but not limited to: general economic conditions and government policy decisions, especially policies of the Federal Reserve Bank. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk. In particular, reduced interest rates negatively impact our results of operations. See also “The COVID-19 pandemic could have an adverse impact on our financial condition and our results of operations and other aspects of our business.”
We are subject to lending risk. There are inherent risks associated with our lending activities. These risks include the impact of changes in interest rates and changes in the economic conditions in the markets we serve, as well as those across the United States. An increase in interest rates or weakening economic conditions (such as high levels of unemployment), including weakening economic conditions as a result of the COVID-19 pandemic, has and could further adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans. As of September 30, 2020, the Bank had $126.7 million of loan modifications remaining due to pandemic-related borrower requests. See “Allowance for Loan Losses” for discussion of COVID-19 qualitative factors, and related provision for loan losses. Downward pressure on real estate values could increase the potential for problem loans and thus have a direct impact on our consolidated results of operations. See also “The COVID-19 pandemic could have an adverse impact on our financial condition and our results of operations and other aspects of our business.”
The COVID-19 pandemic could have an adverse impact on our financial condition and our results of operations and other aspects of our business.
We are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our business. While still evolving, the COVID-19 pandemic has caused significant economic and financial turmoil both in the U.S. and around the world, and has fueled concerns that it will lead to a global recession. These conditions are expected to continue and worsen in the near term. At this time, it is not possible to estimate how long it will take to halt the spread of the virus or the long term effects that the COVID-19 pandemic could have on our business. The extent to which the COVID-19 pandemic impacts our business, results of operations, financial condition, liquidity or prospects will depend on future developments which are highly
74
uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions taken to contain or address its impact.
While we have implemented risk management and contingency plans and taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic and such measures may not adequately predict the impact on our business from such events. Currently, many of our employees are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.
Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 may also adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans. In addition, any resulting downward pressure on real estate values could increase the potential for problem loans and thus have a direct impact on our consolidated results of operations.
We participate as an approved lender pursuant to the Paycheck Protection Program, which was established under the congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The Paycheck Protection Program gives small businesses and self-employed individuals guaranteed loans and loan forgiveness to stay in business during the COVID-19 pandemic, subject to certain requirements. As an SBA-approved lender, we secured more than $139 million in authorized funding for our customers under the Paycheck Protection Program. As a result of factors including the fact that the Paycheck Protection Program is a new program that was created urgently in response to the COVID-19 outbreak, lenders and customers have experienced, and may experience further, challenges in the administration and debt forgiveness process.
While governmental and non-governmental organizations are engaging in efforts to combat the spread and severity of the COVID-19 pandemic and related public health issues, these measures may not be effective. We also cannot predict how legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues will impact our business. Such events or conditions could result in regulation or restrictions affecting the conduct of our business in the future.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)Not applicable.
(b)Not applicable.
(c)Not applicable.
Item 3.DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4.MINE SAFETY DISCLOSURES
Not applicable.
Item 5.OTHER INFORMATION
Not applicable.
75
Item 6.EXHIBITS
(a) Exhibits
| 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
| * | This certification is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. | ||||
76
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CITIZENS COMMUNITY BANCORP, INC. | ||||||||||||||
| Date: November 6, 2020 | By: | /s/ Stephen M. Bianchi | ||||||||||||
| Stephen M. Bianchi | ||||||||||||||
| Chief Executive Officer | ||||||||||||||
| Date: November 6, 2020 | By: | /s/ James S. Broucek | ||||||||||||
| James S. Broucek | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
77