CITIZENS COMMUNITY BANCORP, INC.
See accompanying condensed notes to unaudited consolidated financial statements.
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 Federal N.A. (the “Bank”) included herein have been included by its parent company, 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"“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. The U.S. Office of the Comptroller of the Currency (the "OCC"“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 and Michigan through 2124 branch locations. Its primary markets include the Chippewa Valley Region in Wisconsin, the Mankato and Twin Cities and Mankatomarkets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, Agriculturalagricultural operators and consumers, including one to fourone-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 March 31, 2023, balance sheet date as of December 31, 2017 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.
On August 18, 2017, the Company completed its merger with Wells Financial Corporation ("WFC"), pursuant to the merger agreement, dated March 17, 2017. At that time, the separate corporate existence of WFC ceased, and the Company survived the merger. In connection with the merger, the Company caused Wells Federal Bank to merge with and into the Bank, with the Bank surviving the merger. The merger expands the Bank's market share in Mankato and southern Minnesota, and added seven branch locations along with expanded services through Wells Insurance Agency, Inc.
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.
Use of Estimates – Preparation –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 loancredit losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of acquired intangible assets arising from acquisitions, useful lives for depreciation and amortization, indefinite-lived intangible assets, stock-based compensationvaluation 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"“Risk Factors” in Item 1A of the annual report on Form 10-K for the year ended September 30, 2017,December 31, 2022, filed with the SEC on December 13, 2017,March 7, 2023; the matters described in “Risk Factors” in Item 1A of this Form 10-Q; external market factors such as market interest rates and unemployment rates,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 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 deemed other than temporarily impaired due to non-credit issues 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. Realized gains or losses on sales of available for sale securities are calculated with the specific identification method and are included in the consolidated statements of operations under net gains on investment securities. 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 underlying 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;to: the Company'sCompany’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'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'sCompany’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 investments - 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.
Also included in equity investments are the Company’s investments in a Volker Rule-compliant Small Business Investment Company ("SBIC") and an investment fund. The SBIC and investment fund meet the definition of investment companies, as defined in ASC 946, Financial Services - Investment Companies. These investments seek returns by investing in various small businesses and do not have redemption rights. Distributions from the investments will be received as the underlying investments, which generally have a life of 10 years, are liquidated. We elected the practical expedient available in Topic 820, Fair Value Measurements, which permits the use of net asset value ("NAV") per share or equivalent to value investments in entities that are or are similar to investment companies. SBICs and investment funds report their investments at estimated fair value. We record the unrealized gains and losses resulting from changes in the fair value of these investments as gains or losses on equity securities in our consolidated statements of operations. The carrying value of these investments is equal to the capital account as provided by the investee and adjusted as necessary.
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 $17,428 at March 31, 2023 consisted of $9,240 of FHLB stock, $5,680 of Federal Reserve Bank stock and $2,508 of Bankers’ Bank stock. Other investments totaling $15,834 at December 31, 2022 consisted of $7,652 of FHLB stock and $5,674 of Federal Reserve Bank stock and $2,508 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 unearned interest, and net ofof: deferred loan fees and costs.costs, accretable yield on acquired loans and noncredit discount on purchased credit deteriorated (PCD) loans. Interest income is accrued on the unpaid principal balance of these loans.loans and is presented as a separate line item on the consolidated balance sheets. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments. Delinquencyover the contractual life of the loan with no prepayments assumed. If the loan is prepaid, any unamortized net fee is recognized at this time. Late charge fees are recognized into income when chargeable, assuming collection is reasonably assured.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/Commercial and industrial/agricultural non-real estateoperating loans past due 90 days or more;
•Closed end consumer non-real estateinstallment loans past due 120 days or more; and
•Residential real estatemortgage loans and open ended consumer non-real estateinstallment 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 basis or cost recovery method and is generally applied against principal, 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 6six month payment history has been established. Interest on impaired loans considered troubled debt restructurings (“TDRs”) or substandard, less than 90 days delinquent, is recognized as income as it accrues based on the revised terms of the loan over an established period of continued payment. 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.
Residential real estatemortgage 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 endended 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 loans, including Commercial/agricultural real estate, commercial and C&Iindustrial 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 18090 days or more for open ended loans or loans secured by real estate collateral, or the loan becomes 120 days past due or more for loans secured by non-real estate collateral.more.
The Company defines Acquired Loans as all loans acquired in a business combination accounted for under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805, "Business Combinations".
These loans include, but are not limited to loans accounted for under FASB ASC 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" as discussed below. All other loans are defined as Originated Loans.
Allowance for LoanCredit Losses – Loans The allowance for loancredit losses (“ALL”ACL”) is a valuation allowance for current expected credit losses in the Company’s loan portfolio. Prior to January 1, 2023, the valuation allowance was established for probable and inherent credit losses in our loan portfolio.losses. Loan losses are charged against the ALLACL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. ManagementACL. In determining the allowance, the company estimates credit losses over the required ALL balance taking into account the following factors: past loanloan’s entire contractual term, adjusted for expected prepayments when appropriate. The allowance estimate considers relevant available information from internal and external sources relating to historical loss experience; the nature, volume and composition of our loan portfolio; known and inherent risks in our loan portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; reasonable and supportable forecasts for future conditions; and other relevant factors determined by management. The ALL consists of specificTo ensure that the ACL is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and general components. The specific component relatesan appropriate provision is made 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.adjust the allowance. The entire ALLACL balance is available for any loan that, in our management’s judgment, should be charged off.
A loanThe determination of the ACL requires significant judgement to estimate credit losses. The ACL on loans is impairedmeasured collectively on a pooled basis when full payment undersimilar risk characteristics exist, and on an individual basis when management determines that the loan termsdoes not share similar risk characteristics with other loans. The ACL on loans collectively evaluated is measured using the loss rate model. The Company categorizes its loan portfolio into four segments based on similar risk characteristics. Loans within each segment are pooled based on individual loan characteristics. Aggregated risk drivers are then calculated at a pool level. Risk drivers are identified attributes that have proven to be predictive of loan loss rates and vary based on loan segment and type. A loss rate is calculated and applied to the pool utilizing a model that combines the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. The loss rate is then combined with the loans balance and contractual maturity, adjusted for expected prepayments, to determine expected future losses. Future and supportable economic forecasts are based on national economic conditions and their reversion to the mean is implicit in the model and generally occurs over a period of two years.
Qualitative adjustments are made to the allowance calculated on collectively evaluated loans to incorporate factors not expected. Impaired loans consistincluded in the model. Qualitative factors include but are not limited to, lending policies and procedures, the experience and ability of all TDRs, as well as individual substandard loans not considered a TDR when full payment underlending and other staff, the volume and severity of problem credits, quality of the loan terms is not expected. All TDRsreview system, and other external factors.
Loans that exhibit different risk characteristics from the pool are individually evaluated for impairment. See Note 3, “Loans, AllowanceLoans can be identified for Loan Lossesindividual evaluation for a variety of reasons including delinquency, nonaccrual status, risk rating and Impaired Loans” for more information on what we consider toloan modification. Accruing loans that exhibit different risk characteristics from their pool may also be a TDR. If a TDR or substandard loan is deemed to be impaired, a specific ALL allocationwithin scope. On these loans, an allowance may be established so that the loan is reported, net, at the lower of (a) outstanding principal balance,its amortized cost; (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 the loan is collateral dependent. Collateral dependency is determined using the practical expedient when: 1) the borrower is experiencing financial difficulty; and 2) repayment is expected solelyto be provided substantially through the sale or operation of the collateral.
The Company has elected to not measure an ACL on accrued interest as it writes off accrued interest in a timely manner.
Allowance for Credit Losses - Unfunded Commitments - The ACL on unfunded commitments is a liability for credit losses on commitments to originate or fund loans, and standby letters of credit. It is included in “Other liabilities” on the consolidated balance sheets. Expected credit losses are estimated over the contractual period in which the Company is exposed to credit risk via a commitment that cannot be unconditionally canceled, adjusted for projected prepayments when appropriate. In addition,the estimate of the liability considers the likelihood that funding will occur. The ACL on unfunded commitments is adjusted through provision for credit losses on consolidated statements of operations. Because the business processes and risks associated with unfunded commitments are essentially the same as loans, the Company uses the same process to estimate the liability.
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 as 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.
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 underlying collateralentity, (2) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the loan. For TDRs less than 90 days past due,transferred assets, and certain substandard loans that are less than 90 days delinquent,(3) the likelihood ofentity does not maintain effective control over the loan migratingtransferred assets through an agreement 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 consumer and residential real estate loans, as well as non-TDR commercial loans, are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.repurchase them before maturity.
Mortgage Servicing Rights- Rights— Mortgage servicing rights ("MSR"(“MSR”) assets initially aroseresult as a result of the WFC merger. WFC had retained the right to service certain loans sold in the secondary market. The Company continues to sellsells loans to investors in the secondary market and generally retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value; assessed for impairment at least annually for impairment;annually; 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 mortgage servicing rights expense 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.
Acquired Loans -Loans acquiredServicing fee income, which is reported on the consolidated statements of operations in connection with acquisitionsnon-interest income as loan servicing income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of outstanding principal; or a fixed amount per loan and are recorded at their acquisition-date fair value with no carryover of related allowance for credit 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 ultimately are not 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.as income when earned.
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 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.
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 yield 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 yield 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.
Loans Acquired through Business Combination with Deteriorated Credit Quality - ASC Topic 310-30, "Loan and Debt Securities Acquired with Deteriorated Credit Quality", applies to loans acquired in a business combination that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that we will be unable to collect all contractually required payments receivable. In accordance with this guidance, these loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield”, is recognized as interest income over the life of the loans using a method that approximates the level-yield method. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference”, are not recognized as a yield adjustment, a loss accrual, or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairments. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.
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 valuation allowance is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other on our Consolidated Statements of Operations.
Goodwill and other intangible assets-assets—The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, "Intangibles“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 doesGoodwill is not amortize goodwillamortized but, instead, is subject to impairment tests on at least an annual basis, and any acquired intangible asset withmore frequently if an indefinite useful economic life, but reviews them for impairment atevent occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit level on an annual basis, or when events or changes in circumstances indicate that thebelow its carrying amounts may be impaired.amount. 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 September 30, 2017March 31, 2023, which is related to its banking activities. The impairment testing process is conducted by assigning net assets and goodwill to the Company’s reporting unit. An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of the Company’s reporting unit is calculated and compared to the recorded book value, “step one.” If the calculated fair value of the Company’s reporting unit exceeds its carrying value, goodwill is not considered impaired and “step two” is not considered necessary. If the carrying value of the Company’s reporting unit exceeds its calculated fair value, the impairment test continues (“step two”) by comparing the carrying value of the Company’s reporting unit’s goodwill to the implied fair value of goodwill. An impairment charge is recognized if the carrying value of goodwill exceeds the implied fair value of goodwill. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of September 30, 2017.December 31, 2022. The Company has monitored
events and conditions since December 31, 2022, and has determined that no triggering event has occurred that would require goodwill to be tested for impairment.
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.
New Markets Tax Credits - As a part of its commitment to the communities it serves, in the first quarter of 2022, the Company made an investment in an LLC that is sponsoring a community development project that has been awarded a New Markets Tax Credit (NMTC) through the U.S. Department of the Treasury’s Community Development Financial Institutions Fund. This investment is Community Reinvestment Act eligible and is designed to generate a return primarily through the realization of the tax credit. This LLC is considered a Variable Interest Entity (VIE) as the Company represents the holder of the equity investment at risk, but does not have the ability to direct the activities that most significantly affect the performance of the LLC. As such, the Company is not the primary beneficiary of the VIE and the LLC has not been consolidated. With the adoption of ASU 2023-02 on January 1, 2023 discussed in Recent Accounting Pronouncements - Adopted below, the investment is accounted for using the proportional amortization method, which requires amortizing the investment in the period of and in proportion to the recognition of the related tax credit. Amortization of the investment is included in provision for income taxes and the utilization of the tax credit is recorded as a reduction in provision for income taxes. Prior to the adoption of ASU 2023-02 the investment was accounted for using the equity method of accounting and was amortized through non-interest expense
As of March 31, 2022, the carrying amount of this investment, which is included in other assets in the consolidated balance sheets, was $3,334. Prior to the adoption of ASU 2023-02, the carrying value of the investment as of December 31, 2022 was $3,350. The risk of loss with this investment is limited to its carrying value and is tied to its ability to operate in compliance with the rules and regulations necessary for the qualification of the tax credit generated by the investment. As of March 31, 2023, there were no known instances of noncompliance associated with the investment.
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. Lease expense is included in non-interest expense, occupancy in the consolidated statements of operations.
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 sheets. Debt issuance costs with a Company call option that originated prior to 2020 and senior note 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 statements of operations. Debt issuance costs that originated in 2020 and thereafter, are amortized through the first Company call option date of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statements 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 sheets, 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 FASB ASCFinancial 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.basis. 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 Tax Cuts and Jobs Act of 2017 ("the Tax Act"), enacted on December 22, 2017, reduces corporate Federal income tax rates for the Company from 34% to 24.5% for 2018, and 21% for 2019. GAAP requires the impact of the provisions of the Tax Act be accounted for in the period of enactment. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we have made a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Company revalued its net deferred tax assets to account for the future impact of lower corporate taxes. For the items for which we were able to determine a reasonable estimate, we recorded an increased provisional amount of income tax expense of $275 in December 2017, related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the unrealized loss on securities. The increase was partially offset by an approximately $135 reduction in income tax expense due to a lower corporate tax rate.
Provisional amounts. Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amounts recorded related to the re-measurement of our deferred tax balance was $275.
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 carryforwardcarry forward periods, any experience with utilization of operating loss and tax credit carryforwardscarry 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. TheCompany’s 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.
The Company accounts for revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers.” Topic 606 provides that revenue from contracts with customers be recognized when performance obligations under the terms of a contract are satisfied. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing service. The Company does not have any materially significant payment terms as payment is received shortly after the satisfaction of the performance obligation. The non-interest income line items recognized under the scope of Topic 606 are as follows:
Service charges on deposit accounts - Service charges on accounts consist of monthly service fees, transaction-based fees, overdraft services and other deposit account related fees. The Company’s performance obligation for monthly services fees is generally satisfied over the period in which the service is provided. Revenue for these monthly fees is recognized during the service period. Other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied at the time the service is provided. Payment for service charges on deposit accounts are primarily received immediately or in the following month through a direct charge to a customer’s account.
Interchange income - The Company earns interchange fees when cardholder debit card transaction are processed through card association networks. The interchange rates are generally set by the card association based upon purchase volumes and other factors. Interchange fees represent a percentage of the underlying transaction value. The Company has a continuous contract, based on customary business practices, with the card association networks to make funds available for settlement of card transactions. The Company’s performance obligation is satisfied over time as it makes funds available, and the related income is recognized when received.
Gain (loss) on repossessed assets - The Company records a gain or loss from the sale of repossessed assets, when control of the property or asset transfers to the buyer, which generally occurs at the time of an executed deed or sales agreement. When the company finances the sale of repossessed assets to a buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the repossessed asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain on sale or loss on the sale, the Company adjust the transaction price and related gain or loss on sale if a significant financing component is present.
Non-interest income outside of the scope of Revenue from Contracts with Customers, Topic 606 is recognized on the accrual basis of accounting as services are provided or as transactions occur. Non-interest income outside of the scope of Topic 606 includes fees from brokerage and advisory service, deposit accounts, merchant services, ATM and debit card fees, mortgage banking activities, loan fees and service charges, net gains (losses) on investment securities, and other, miscellaneous services and transactions. Commission revenuewhich is recognized asprimarily made up 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 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.BOLI related income.
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'sCompany’s stock price on the reporting date.
Loss Contingencies—Loss contingencies, including claims and legal actions arising in the normal course of business, are recorded as liabilities when the likelihood of loss is probable and an amount of loss can be reasonably estimated.
Other Comprehensive Income —Accumulated and other comprehensive income or loss is comprised of the unrealized and realized gains and losses on securities available for sale, net of tax, and is shown on the accompanying consolidated statements of comprehensive income.
Operating Segments—While our chief decision makersexecutive 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 - In May 2017,Pronouncements—The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB issued Accounting Standards Update ("ASU") 2017-09, "Compensation--Stock CompensationCodification (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 2020-04 and ASU 2021-01, Reference Rate Reform (Topic 718): Scope848) - Facilitation of Modification Accounting."the Effects of Reference Rate Reform on Financial Reporting--These ASUs provide 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 2017-09 provides specific guidance as to which changes to terms2020-04 and conditions of share-based payment awards require an entity to apply modification accounting in Topic 718. For public entities, ASU 2017-09 is2021-01 are effective for fiscal years beginning afterthe Company immediately and through December 15, 2017,
including interim periods within those fiscal years. Early adoption is permitted.31, 2024. The Company expectsutilizes LIBOR, among other indexes, as a reference rate for underwriting variable rate loans. Reference rate reform has not had, nor does the adoption of ASU 2017-09 willCompany expect it to have, noa material effect on the Company'sCompany’s consolidated results ofbalance sheet, operations financial position or cash flows.
In March 2017, the FASB issued ASU 2017-08, "Receivables--Nonrefundable fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. For public entities, ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects the adoption of ASU 2017-08 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.
In February 2017, the FASB issued ASU 2017-05, "Other Income--Gains and Losses from the Derecognition of Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Non-financial Assets." ASU 2017-05 clarifies previously issued ASU 2014-09, primarily with respect to (a) derecognition of an in substance non-financial asset, and (b) partial sales of non-financial assets. For public entities, ASU 2017-05 is effective at the same time of adoption of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is for annual reporting periods beginning after December 15, 2017 and related interim periods. Early adoption is not permitted. The Company expects the adoption of ASU 2017-05 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.
In January, 2017, the FASB issued ASU 2017-04, "Intangibles--Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 intends to simplify how an entity is required to test goodwill impairment. For public entities, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and any related interim annual goodwill impairment tests thereon. The Company expects the adoption of ASU 2017-04 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.
In January, 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." ASU 2017-01 narrows the definition of a "business" with respect to accounting for business combinations. For public entities, ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company expects the adoption of ASU 2017-01 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.
In June, 2016 the FASB issued ASU 2016-13, “FinancialFinancial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.”Instruments--The ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the exceptedchanges accounting for credit losses on financial instrumentsloans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other commitments to extend credit. For public entities,things, ASU 2016-13 is effectiverequires the measurement of all expected credit losses for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has not yet evaluatedfinancial assets held at the potential effects of adoptingreporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 onrequires the Company’s consolidated resultsuse of operations, financial position or cash flows. The Company has not yet evaluatedforward-looking information to form credit loss estimates. Many of the potential effectsloss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of adoptingexpected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on the Company's consolidated results of operations,debt securities and purchased financial position or cash flows.
assets with credit deterioration. In May 2016,November, 2019, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients.”2019-10, which delayed the effective date for ASU 2016-12 is intended to address certain specific issues identified by2016-13 for smaller reporting companies, resulting in ASU 2016-13 becoming effective in the FASB-IASB Joint Transition Resource Group for Revenue Recognition with respect to ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” For public entities, ASU 2016-12 and ASU 2014-09 are effective on a retrospective basisfirst quarter of 2023 for the annual periods,Company. Earlier adoption was permitted; however, the Company elected not to adopt the ASU early.
The Company formed a cross-functional team to implement ASU 2016-13. Key objectives of the team included selecting a loss estimation methodology, establishing processes and interim periods within those annualcontrols, data validation, creation of supporting analytics, documentation of policies and procedures, and developing disclosures. As previously disclosed, the Company is utilizing a third-party model to assist in loss estimation including pooling loans with similar risk characteristics and modeling methodologies.
The Company adopted ASU 2016-13 using the modified retrospective approach effective January 1, 2023. Results for the periods beginning on and after December 15, 2017. Early adoption is not permitted. Based on our evaluationJanuary 1, 2023 are presented under the current guidance, we estimate that substantially allASU 2016-13 while prior period amounts are reported in accordance with previously applicable accounting standards. The company recorded a reduction to retained earnings of our interest income and non-interest income will not be impacted by$4,432 upon the adoption of these standards, because eitherASU 2016-13, primarily due to the revenue from those contracts with customers is covered by other guidancerequirement to estimated credit losses over the life of the loan and the duration of the Company’s portfolio. The Company also recorded an increase to the ACL of $4,706. This increase was made up of two components, $4,576 for non-purchased credit deteriorated (“PCD”) loans and $130 for PCD loans. An ACL on unfunded commitments of $1,537 was also established. The Company elected not to record an allowance on HTM securities as the portfolio consists almost entirely of agency-backed securities that inherently have minimal nonpayment risk. The transition adjustment included corresponding increases in U.S. GAAP, ordeferred tax assets.
The Company adopted ASU 2016-13 using the anticipated revenue recognition outcomesprospective transition approach for financial assets considered PCD. These assets were previously classified as purchase credit impaired ("PCI") and accounted for under ASC 310-30 prior to January 1, 2023. In accordance with the adoptionstandard, the Company did not reassess whether the PCI assets met the criteria of these standards will likely be similar to our current revenue recognition practices. The company evaluated certain non-interest revenue streams, including deposit related fees, service charges and interchange fees, to determine the potential impactPCD assets as of the guidanceadoption date. The amortized cost of the PCD assets were adjusted to reflect the addition of $130 to the allowance for credit losses. This adjustment is included in the discussion of the transition adjustment above. The remaining noncredit discount, based on the Company's consolidated financial statements. The Company is expected to use the modified retrospective method for transition, in which the cumulative effectadjusted amortized cost, will be recognizedaccreted into interest income at the dateeffective interest rate over the remaining life of adoption with no restatement of comparative periods presented. The Company expects additional financial statement disclosures of non-interest income revenue streams and associated internal controls to be implemented along with the adoption of these standards. In addition, we are reviewing our business processes, systems and controls to support recognition and disclosures under the new standard. The Company expects that the adoption of ASUs 2016-12 and 2014-09 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 is intended to simplify certain areas of share-based payment transaction accounting, including the income tax consequences, equity or liability classification of certain share awards, and classification on the statement of cash flows. ASU 2016-09 is effective for the annual periods, and interim periods within those
assets.
annual periods, beginning after December 15, 2016. Early adoption is permitted. The Company expects the adoptions of ASU 2016-09 to have no material effect on the Company's results of operations, financial position or cash flows.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". ASU 2016-02 is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company has not yet evaluatedfollowing table illustrates the impact of ASU 2016-02 on the Company's results of operations, financial position or cash flows.2016-13 adoption in thousands
In January 2016, | | | | | | | | | | | | | | | | | | | | |
| | Pre-ASU 2016-13 Adoption
December 31, 2022 | | Impact of
ASU 2016-13 Adoption | | As Reported under ASU 2016-13
January 1, 2023 |
| Allowance for credit losses: | | | | | | |
| Commercial/Agricultural Real Estate | | $ | 14,085 | | | $ | 4,510 | | | $ | 18,595 | |
| C&I/Agricultural operating | | 2,318 | | | (331) | | | 1,987 | |
| Residential Mortgage | | 599 | | | 1,119 | | | 1,718 | |
| Consumer Installment | | 129 | | | 216 | | | 345 | |
| Unallocated | | 808 | | | (808) | | | — | |
| Total allowance for credit losses on loans | | 17,939 | | | 4,706 | | | 22,645 | |
| Allowance for credit losses on unfunded commitments | | — | | | 1,537 | | | 1,537 | |
| Total allowance for credit losses | | $ | 17,939 | | | $ | 6,243 | | | $ | 24,182 | |
ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures - The ASU addresses and amends areas identified by the FASB issued ASU 2016-01, "Financial Instruments-overall (Subtopic 825-10): Recognitionas part of its post-implementation review of the accounting standard that introduced the current expected credit losses model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the current expected credit losses model and Measurement of Financial Assetsenhance the disclosure requirements for loan refinancings and Financial Liabilities”. ASU 2016-01 is intended to address certain aspects of recognition, measurement, presentation andrestructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of financial instruments. For public entities,current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The company adopted ASU 2016-01 is effective2022-02 in conjunction with ASU 2016-13 on January 1, 2023 using the prospective approach.
ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted, exceptProportional Amortization Method - This ASU expands the use of the proportional amortization method in accounting for tax credit investments to all tax credit investments that meet certain provisions of ASU 2016-01, which are not applicable to the Company.criteria. The Company expectshas determined that its New Markets Tax Credit investment qualifies for use of the proportional amortization method under this ASU and has elected to early adopt the update as of January 1, 2023 using the modified retrospective approach. The transition adjustment resulted in an increase to retained earnings of $130. Amortization of the investment will now be recognized in the period of and proportional to recognition of the related tax credit and included in provision for income taxes in the consolidated statements of operations. Prior to adoption of this amendment, the amortization was included in other non-interest expense as a separate line item.
The Company chose to adopt ASU 2016-01 to have no material effect on2023-02 because it felt that the Company's consolidated resultsproportional amortization method more accurately reflects the economic substance of operations, financial position or cash flows.its tax credit investment. Proportional amortization better matches the cost of the investment with the benefits received, and including the amortization of the investment in provision for income taxes better reflects the benefit the Company receives from the transaction. For the three months ended March 31, 2023, adopting ASU 2023-02 increased net income $32.
Recently Issued, But Not Yet Effective Accounting Pronouncements
None
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 March 31, 2023 and December 31, 2017 and September 30, 2017,2022, respectively, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Available for sale securities | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Value |
| March 31, 2023 | | | | | | | |
| U.S. government agency obligations | $ | 25,213 | | | $ | 153 | | | $ | 184 | | | $ | 25,182 | |
| | | | | | | |
| Mortgage-backed securities | 96,020 | | | — | | | 17,061 | | | 78,959 | |
| | | | | | | |
| Corporate debt securities | 47,141 | | | — | | | 4,926 | | | 42,215 | |
| Corporate asset-based securities | 27,933 | | | 11 | | | 877 | | | 27,067 | |
| | | | | | | |
| Total available for sale securities | $ | 196,307 | | | $ | 164 | | | $ | 23,048 | | | $ | 173,423 | |
| | | | | | | |
| December 31, 2022 | | | | | | | |
| U.S. government agency obligations | $ | 18,373 | | | $ | 173 | | | $ | 233 | | | $ | 18,313 | |
| | | | | | | |
| Mortgage-backed securities | 97,458 | | | — | | | 18,848 | | | 78,610 | |
| | | | | | | |
| Corporate debt securities | 44,636 | | | — | | | 4,385 | | | 40,251 | |
| Corporate asset-based securities | 29,877 | | | — | | | 1,060 | | | 28,817 | |
| | | | | | | |
| Total available for sale securities | $ | 190,344 | | | $ | 173 | | | $ | 24,526 | | | $ | 165,991 | |
|
| | | | | | | | | | | | | | | |
| Available for sale securities | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| December 31, 2017 | | | | | | | |
| U.S. government agency obligations | $ | 18,098 |
| | $ | 19 |
| | $ | 526 |
| | $ | 17,591 |
|
| Obligations of states and political subdivisions | 35,519 |
| | 135 |
| | 240 |
| | 35,414 |
|
| Mortgage-backed securities | 38,490 |
| | 79 |
| | 549 |
| | 38,020 |
|
| Agency securities | 147 |
| | 89 |
| | 2 |
| | 234 |
|
| Corporate debt securities | 5,393 |
| | — |
| | 104 |
| | 5,289 |
|
| Total available for sale securities | $ | 97,647 |
| | $ | 322 |
| | $ | 1,421 |
| | $ | 96,548 |
|
| | | | | | | | |
| September 30, 2017 | | | | | | | |
| U.S. government agency obligations | $ | 18,454 |
| | $ | 35 |
| | $ | 448 |
| | $ | 18,041 |
|
| Obligations of states and political subdivisions | 35,656 |
| | 270 |
| | 131 |
| | 35,795 |
|
| Mortgage-backed securities | 36,661 |
| | 124 |
| | 311 |
| | 36,474 |
|
| Agency Securities | 147 |
| | 83 |
| | — |
| | 230 |
|
| Corporate debt securities | 5,410 |
| | — |
| | 67 |
| | 5,343 |
|
| Total available for sale securities | $ | 96,328 |
| | $ | 512 |
| | $ | 957 |
| | $ | 95,883 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Held to maturity securities | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Value |
| March 31, 2023 | | | | | | | |
| | | | | | | |
| Obligations of states and political subdivisions | $ | 600 | | | $ | — | | | $ | 45 | | | $ | 555 | |
| Mortgage-backed securities | 94,701 | | | 9 | | | 18,082 | | | 76,628 | |
| Total held to maturity securities | $ | 95,301 | | | $ | 9 | | | $ | 18,127 | | | $ | 77,183 | |
| | | | | | | |
| December 31, 2022 | | | | | | | |
| Obligations of states and political subdivisions | $ | 600 | | | $ | — | | | $ | 54 | | | $ | 546 | |
| Mortgage-backed securities | 95,779 | | | 7 | | | 19,553 | | | 76,233 | |
| Total held to maturity securities | $ | 96,379 | | | $ | 7 | | | $ | 19,607 | | | $ | 76,779 | |
|
| | | | | | | | | | | | | | | |
| Held to maturity securities | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| December 31, 2017 | | | | | | | |
| Obligations of states and political subdivisions | $ | 1,310 |
| | $ | 1 |
| | $ | 2 |
| | $ | 1,309 |
|
| Mortgage-backed securities | 3,917 |
| | 100 |
| | 5 |
| | 4,012 |
|
| Total held to maturity securities | $ | 5,227 |
| | $ | 101 |
| | $ | 7 |
| | $ | 5,321 |
|
| | | | | | | | |
| September 30, 2017 | | | | | | | |
| Obligations of states and political subdivisions | $ | 1,311 |
| | $ | 17 |
| | $ | — |
| | $ | 1,328 |
|
| Mortgage-backed securities | 4,142 |
| | 136 |
| | 1 |
| | 4,277 |
|
| Total held to maturity securities | $ | 5,453 |
| | $ | 153 |
| | $ | 1 |
| | $ | 5,605 |
|
As of DecemberAt March 31, 2017,2023, the Bank has pledged U.S. Government Agencymortgage-backed securities with a marketcarrying value of $2,500$30,396 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of March 31, 2023, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of March 31, 2023, the Bank has pledged U.S. Government Agency securities with a carrying value of $2,224 and mortgage-backed securities with a carrying value of $2,116 as collateral against specific municipal deposits. As of March 31, 2023, the Bank also has mortgage-backed securities with a carrying value of $122 pledged as collateral to the Federal Home Loan Bank of Des Moines.
At December 31, 2017,2022, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $5,421 as collateral to secure a line of credit with the Federal Reserve Bank. As of December 31, 2022, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of December 31, 2017,2022, the Bank has pledged certain of its U.S. Government Agency securities with a marketcarrying value of $7,421$2,602 and mortgage-backed securities with a marketcarrying value of $18,836$2,219 as collateral against specific municipal deposits. As of December 31, 2022, the Bank also has mortgage-backed securities with a carrying value of $142 pledged as collateral to the Federal Home Loan Bank of Des Moines.
For the three month periods ended March 31, 2023 and March 31, 2022, there were no sales of available for sale securities.
The estimated fair value of securities at March 31, 2023 and December 31, 2017 and September 30, 2017,2022, 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Available for sale securities | Amortized
Cost | | Estimated
Fair Value | | Amortized
Cost | | Estimated
Fair Value |
| Due in one year or less | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Due after one year through five years | 11,624 | | | 11,300 | | | 8,525 | | | 8,184 | |
| Due after five years through ten years | 48,688 | | | 43,988 | | | 45,622 | | | 41,427 | |
| Due after ten years | 39,975 | | | 39,176 | | | 38,739 | | | 37,770 | |
| Total securities with contractual maturities | $ | 100,287 | | | $ | 94,464 | | | $ | 92,886 | | | $ | 87,381 | |
| Mortgage-backed securities | 96,020 | | | 78,959 | | | 97,458 | | | 78,610 | |
| | | | | | | |
| Total available for sale securities | $ | 196,307 | | | $ | 173,423 | | | $ | 190,344 | | | $ | 165,991 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Held to maturity securities | Amortized
Cost | | Estimated
Fair Value | | Amortized
Cost | | Estimated
Fair Value |
| Due in one year or less | $ | 100 | | | $ | 97 | | | $ | — | | | $ | — | |
| Due after one year through five years | 500 | | | 458 | | | 450 | | | 415 | |
| Due after five years through ten years | — | | | — | | | 150 | | | 131 | |
| | | | | | | |
| Total securities with contractual maturities | 600 | | | 555 | | | 600 | | | 546 | |
| Mortgage-backed securities | 94,701 | | | 76,628 | | | 95,779 | | | 76,233 | |
| Total held to maturity securities | $ | 95,301 | | | $ | 77,183 | | | $ | 96,379 | | | $ | 76,779 | |
|
| | | | | | | | | | | | | |
| | December 31, 2017 | | September 30, 2017 |
| Available for sale securities | Amortized Cost | Estimated Fair Value | | Amortized Cost | Estimated Fair Value |
| Due in one year or less | $ | 299 |
| $ | 299 |
| | $ | 160 |
| $ | 160 |
|
| Due after one year through five years | 15,377 |
| 15,291 |
| | 15,008 |
| 15,056 |
|
| Due after five years through ten years | 30,427 |
| 29,983 |
| | 30,586 |
| 30,330 |
|
| Due after ten years | 12,907 |
| 12,721 |
| | 13,766 |
| 13,633 |
|
| | $ | 59,010 |
| $ | 58,294 |
| | $ | 59,520 |
| $ | 59,179 |
|
| Mortgage backed securities | 38,490 |
| 38,020 |
| | 36,661 |
| 36,474 |
|
| Securities without contractual maturities | 147 |
| 234 |
| | 147 |
| 230 |
|
| Total available for sale securities | $ | 97,647 |
| $ | 96,548 |
| | $ | 96,328 |
| $ | 95,883 |
|
|
| | | | | | | | | | | | | |
| | December 31, 2017 | | September 30, 2017 |
| Held to maturity securities | Amortized Cost | Estimated Fair Value | | Amortized Cost | Estimated Fair Value |
| Due after one year through five years | $ | 1,310 |
| $ | 1,309 |
| | $ | 1,311 |
| $ | 1,328 |
|
| Mortgage backed securities | 3,917 |
| 4,012 |
| | 4,142 |
| 4,277 |
|
| Total held to maturity securities | $ | 5,227 |
| $ | 5,321 |
| | $ | 5,453 |
| $ | 5,605 |
|
Securities with unrealized losses at March 31, 2023 and December 31, 2017 and September 30, 2017,2022, 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 |
| March 31, 2023 | | | | | | | | | | | | |
| U.S. government agency obligations | | $ | 5,015 | | | $ | 7 | | | $ | 2,923 | | | $ | 177 | | | $ | 7,938 | | | $ | 184 | |
| | | | | | | | | | | | |
| Mortgage-backed securities | | — | | | — | | | 78,934 | | | 17,061 | | | 78,934 | | | 17,061 | |
| | | | | | | | | | | | |
| Corporate debt securities | | 17,080 | | | 1,070 | | | 25,135 | | | 3,856 | | | 42,215 | | | 4,926 | |
| Corporate asset-based securities | | — | | | — | | | 25,801 | | | 877 | | | 25,801 | | | 877 | |
| | | | | | | | | | | | |
| Total | | $ | 22,095 | | | $ | 1,077 | | | $ | 132,793 | | | $ | 21,971 | | | $ | 154,888 | | | $ | 23,048 | |
| December 31, 2022 | | | | | | | | | | | | |
| U.S. government agency obligations | | $ | 3,169 | | | $ | 138 | | | $ | 1,138 | | | $ | 95 | | | $ | 4,307 | | | $ | 233 | |
| | | | | | | | | | | | |
| Mortgage backed securities | | 9,654 | | | 896 | | | 68,907 | | | 17,952 | | | 78,561 | | | 18,848 | |
| | | | | | | | | | | | |
| Corporate debt securities | | 21,547 | | | 1,688 | | | 18,704 | | | 2,697 | | | 40,251 | | | 4,385 | |
| Corporate asset-based securities | | 7,955 | | | 221 | | | 20,862 | | | 839 | | | 28,817 | | | 1,060 | |
| | | | | | | | | | | | |
| Total | | $ | 42,325 | | | $ | 2,943 | | | $ | 109,611 | | | $ | 21,583 | | | $ | 151,936 | | | $ | 24,526 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 Months | | 12 Months or More | | Total |
| Held to maturity securities | | Fair
Value | | Unrealized
Loss | | Fair
Value | | Unrealized
Loss | | Fair
Value | | Unrealized
Loss |
| March 31, 2023 | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | — | | | $ | — | | | $ | 555 | | | $ | 45 | | | $ | 555 | | | $ | 45 | |
| Mortgage-backed securities | | 365 | | | 9 | | | 76,035 | | | 18,073 | | | 76,400 | | | 18,082 | |
| Total | | $ | 365 | | | $ | 9 | | | $ | 76,590 | | | $ | 18,118 | | | $ | 76,955 | | | $ | 18,127 | |
| December 31, 2022 | | | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | — | | | $ | — | | | $ | 546 | | | $ | 54 | | | $ | 546 | | | $ | 54 | |
| Mortgage-backed securities | | 16,627 | | | 2,416 | | | 59,367 | | | 17,137 | | | 75,994 | | | 19,553 | |
| Total | | $ | 16,627 | | | $ | 2,416 | | | $ | 59,913 | | | $ | 17,191 | | | $ | 76,540 | | | $ | 19,607 | |
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 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. Unrealized losses reflected in the preceding tables have not been included in results of operations because the unrealized loss was not deemed other-than-temporary. Management has determined that more likely than not, the Company neither intends to sell, nor will it be required to sell each debt security before its anticipated recovery, and therefore recovery of cost will occur.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
| December 31, 2017 | | | | | | | | | | | | |
| U.S. government agency obligations | | $ | 3,952 |
| | $ | 35 |
| | $ | 10,976 |
| | $ | 491 |
| | $ | 14,928 |
| | $ | 526 |
|
| Obligations of states and political subdivisions | | 17,702 |
| | 168 |
| | 3,043 |
| | 72 |
| | 20,745 |
| | 240 |
|
| Mortgage backed securities | | 21,934 |
| | 258 |
| | 9,786 |
| | 291 |
| | 31,720 |
| | 549 |
|
| Agency securities | | 41 |
| | 2 |
| | — |
| | — |
| | 41 |
| | 2 |
|
| Corporate debt securities | | 5,289 |
| | 104 |
| | — |
| | — |
| | 5,289 |
| | 104 |
|
| Total | | $ | 48,918 |
| | $ | 567 |
| | $ | 23,805 |
| | $ | 854 |
| | $ | 72,723 |
| | $ | 1,421 |
|
| September 30, 2017 | | | | | | | | | | | | |
| U.S. government agency obligations | | $ | 8,296 |
| | $ | 186 |
| | $ | 6,932 |
| | $ | 262 |
| | $ | 15,228 |
| | $ | 448 |
|
| Obligations of states and political subdivisions | | 8,170 |
| | 62 |
| | 3,701 |
| | 70 |
| | 11,871 |
| | 132 |
|
| Mortgage backed securities | | 14,167 |
| | 96 |
| | 9,753 |
| | 215 |
| | 23,920 |
| | 311 |
|
| Corporate debt securities | | 5,343 |
| | 67 |
| | — |
| | — |
| | 5,343 |
| | 67 |
|
| Total | | $ | 35,976 |
| | $ | 411 |
| | $ | 20,386 |
| | $ | 547 |
| | $ | 56,362 |
| | $ | 958 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 Months | | 12 Months or More | | Total |
| Held to maturity securities | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| December 31, 2017 | | | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | 1,133 |
| | $ | 1 |
| | $ | 140 |
| | $ | 1 |
| | $ | 1,273 |
| | $ | 2 |
|
| Mortgage-backed securities | | 368 |
| | 5 |
| | — |
| | — |
| | 368 |
| | 5 |
|
| Total | | $ | 1,501 |
| | $ | 6 |
| | $ | 140 |
| | $ | 1 |
| | $ | 1,641 |
| | $ | 7 |
|
| September 30, 2017 | | | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Mortgage-backed securities | | 406 |
| | 1 |
| | — |
| | — |
| | 406 |
| | 1 |
|
| Total | | $ | 406 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 406 |
| | $ | 1 |
|
NOTE 3 – LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES AND IMPAIRED LOANS
Portfolio Segments:
Residential real estate 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 real estate portfolio as relatively small loan amounts are 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.
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%.
Consumer non-real estate loans are comprised of originated indirect paper loans secured primarily by boatsCommercial and recreational vehicles, purchased indirect paper loans secured primarily by household goods and other consumer loans secured primarily by automobiles and other personal assets. Consumer loans underwriting terms often depend on the collateral type, debt to income ratio and the borrower's creditworthiness as evidenced by their credit score. Collateral value alone may not provide an adequate source of repayment of the outstanding loan balance in the event of a consumer non-real estate default. This shortage is a result of the greater likelihood of damage, loss and depreciation for consumer based collateral.
Commercial non-real estateindustrial (“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 non-real estateoperating 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. 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.
Loans are stated at the principal amount outstanding net of unearned net deferred fees and costs and loans in process, unearned discounts on acquired loans, and allowance for credit losses (“ACL”). Unearned net deferred fees and costs includes deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximated the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding. A summary of loans at March 31, 2023 follows:
| | | | | | | | | | | | | | |
| March 31, 2023 |
| | Amortized Cost | | % of Total |
| Commercial/Agricultural real estate: | | | | |
| Commercial real estate | | $ | 724,685 | | | 51.0 | % |
| Agricultural real estate | | 90,706 | | | 6.4 | % |
| Multi-family real estate | | 207,686 | | | 14.6 | % |
| Construction and land development | | 114,288 | | | 8.0 | % |
| C&I/Agricultural operating: | | | | |
| Commercial and industrial | | 130,417 | | | 9.2 | % |
| Agricultural operating | | 24,168 | | | 1.7 | % |
| Residential mortgage: | | | | |
| Residential mortgage | | 109,759 | | | 7.7 | % |
| Purchased HELOC loans | | 3,206 | | | 0.2 | % |
| Consumer installment: | | | | |
| Originated indirect paper | | 9,313 | | | 0.7 | % |
| Other consumer | | 6,727 | | | 0.5 | % |
| Total loans receivable | | $ | 1,420,955 | | | 100 | % |
| Less Allowance for credit losses | | (22,679) | | | |
| Net loans receivable | | $ | 1,398,276 | | | |
Loans are stated at the unpaid principal balance outstanding at December 31, 2022.
| | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Loan Principal Balance | | % of Total |
| Commercial/Agricultural real estate: | | | | |
| Commercial real estate | | $ | 725,971 | | | 51.5 | % |
| Agricultural real estate | | 87,908 | | | 6.2 | % |
| Multi-family real estate | | 208,908 | | | 14.8 | % |
| Construction and land development | | 102,492 | | | 7.3 | % |
| C&I/Agricultural operating: | | | | |
| Commercial and industrial | | 136,013 | | | 9.6 | % |
| Agricultural operating | | 28,806 | | | 2.0 | % |
| Residential mortgage: | | | | |
| Residential mortgage | | 105,389 | | | 7.5 | % |
| Purchased HELOC loans | | 3,262 | | | 0.2 | % |
| Consumer installment: | | | | |
| Originated indirect paper | | 10,236 | | | 0.7 | % |
| Other consumer | | 7,150 | | | 0.5 | % |
| Gross Loans | | $ | 1,416,135 | | | 100.3 | % |
| Less: | | | | |
| Unearned net deferred fees and costs and loans in process | | (2,585) | | | (0.2) | % |
| Unamortized discount on acquired loans | | (1,766) | | | (0.1) | % |
| Total loans receivable | | $ | 1,411,784 | | | 100.0 | % |
| Less Allowance for loan losses | | (17,939) | | | |
| Net loans | | $ | 1,393,845 | | | |
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 isratings 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"“Pass” loan means that the condition of the borrower and the performance of the loan is satisfactory or better.
5 - Watch. A "Watch"“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"“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"“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"“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"“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.
Below is a summary of originatedthe amortized cost of loans summarized by class, credit quality risk rating and acquiredyear of origination as of March 31, 2023 and gross charge-offs for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis by Origination Year | | | |
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Revolving to Term | Total |
| Commercial/Agricultural real estate: | | | | | | | | | |
| Commercial real estate | | | | | | | | | |
| Risk rating 1 to 5 | $ | 12,394 | | $ | 138,884 | | $ | 260,942 | | $ | 94,027 | | $ | 74,434 | | $ | 123,651 | | $ | 7,419 | | $ | — | | $ | 711,751 | |
| Risk rating 6 | — | | — | | — | | 337 | | — | | 5,429 | | — | | — | | 5,766 | |
| Risk rating 7 | — | | 190 | | 534 | | 4,630 | | 284 | | 1,517 | | 13 | | — | | 7,168 | |
| Risk rating 8 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 9 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 12,394 | | $ | 139,074 | | $ | 261,476 | | $ | 98,994 | | $ | 74,718 | | $ | 130,597 | | $ | 7,432 | | $ | — | | $ | 724,685 | |
| Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| Agricultural real estate | | | | | | | | | |
| Risk rating 1 to 5 | $ | 10,263 | | $ | 24,209 | | $ | 17,372 | | $ | 8,216 | | $ | 5,793 | | $ | 19,651 | | $ | 1,886 | | $ | — | | $ | 87,390 | |
| Risk rating 6 | — | | — | | — | | — | | — | | 537 | | — | | — | | 537 | |
| Risk rating 7 | — | | 405 | | 808 | | 3 | | 102 | | 1,461 | | — | | — | | 2,779 | |
| Risk rating 8 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 9 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 10,263 | | $ | 24,614 | | $ | 18,180 | | $ | 8,219 | | $ | 5,895 | | $ | 21,649 | | $ | 1,886 | | $ | — | | $ | 90,706 | |
| Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | 32 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 32 | |
| Multi-family real estate | | | | | | | | | |
| Risk rating 1 to 5 | $ | 1,263 | | $ | 41,882 | | $ | 88,727 | | $ | 47,028 | | $ | 8,832 | | $ | 19,954 | | $ | — | | $ | — | | $ | 207,686 | |
| Risk rating 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 7 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 8 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 9 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 1,263 | | $ | 41,882 | | $ | 88,727 | | $ | 47,028 | | $ | 8,832 | | $ | 19,954 | | $ | — | | $ | — | | $ | 207,686 | |
| Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| Construction and land development | | | | | | | | | |
| Risk rating 1 to 5 | $ | 10,551 | | $ | 39,920 | | $ | 49,670 | | $ | 9,022 | | $ | 121 | | $ | 951 | | $ | 3,959 | | $ | — | | $ | 114,194 | |
| Risk rating 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 7 | — | | — | | — | | — | | — | | 94 | | — | | — | | 94 | |
| Risk rating 8 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 9 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 10,551 | | $ | 39,920 | | $ | 49,670 | | $ | 9,022 | | $ | 121 | | $ | 1,045 | | $ | 3,959 | | $ | — | | $ | 114,288 | |
| Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| Commercial/Agricultural operating: | | | | | | | | | |
| Commercial and industrial | | | | | | | | | |
| Risk rating 1 to 5 | $ | 2,852 | | $ | 34,888 | | $ | 31,344 | | $ | 14,152 | | $ | 8,607 | | $ | 5,567 | | $ | 32,509 | | $ | — | | $ | 129,919 | |
| Risk rating 6 | — | | — | | — | | — | | 1 | | — | | 20 | | — | | 21 | |
| Risk rating 7 | — | | — | | 438 | | — | | 1 | | 38 | | — | | — | | 477 | |
| Risk rating 8 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 9 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 2,852 | | $ | 34,888 | | $ | 31,782 | | $ | 14,152 | | $ | 8,609 | | $ | 5,605 | | $ | 32,529 | | $ | — | | $ | 130,417 | |
| Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| Agricultural operating | | | | | | | | | |
| Risk rating 1 to 5 | $ | 435 | | $ | 3,471 | | $ | 1,555 | | $ | 990 | | $ | 714 | | $ | 2,685 | | $ | 12,124 | | $ | — | | $ | 21,974 | |
| Risk rating 6 | — | | 30 | | — | | — | | — | | 132 | | 149 | | — | | 311 | |
| Risk rating 7 | — | | 521 | | 1,185 | | — | | 36 | | 141 | | — | | — | | 1,883 | |
| Risk rating 8 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 9 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 435 | | $ | 4,022 | | $ | 2,740 | | $ | 990 | | $ | 750 | | $ | 2,958 | | $ | 12,273 | | $ | — | | $ | 24,168 | |
| Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continued | Amortized Cost Basis by Origination Year | | | |
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Revolving to Term | Total |
| Residential mortgage: | | | | | | | | | |
| Residential mortgage | | | | | | | | | |
| Risk rating 1 to 5 | $ | 6,982 | | $ | 32,697 | | $ | 9,458 | | $ | 3,065 | | $ | 2,531 | | $ | 38,069 | | $ | 14,087 | | $ | — | | $ | 106,889 | |
| Risk rating 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 7 | — | | — | | 23 | | — | | 14 | | 2,721 | | 57 | | 55 | | 2,870 | |
| Risk rating 8 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 9 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 6,982 | | $ | 32,697 | | $ | 9,481 | | $ | 3,065 | | $ | 2,545 | | $ | 40,790 | | $ | 14,144 | | $ | 55 | | $ | 109,759 | |
| Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 14 | | $ | — | | $ | — | | $ | 14 | |
| Purchased HELOC loans | | | | | | | | | |
| Risk rating 1 to 5 | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 3,206 | | $ | — | | $ | 3,206 | |
| Risk rating 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 7 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 8 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 9 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 3,206 | | $ | — | | $ | 3,206 | |
| Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| Consumer installment: | | | | | | | | | |
| Originated indirect paper | | | | | | | | | |
| Risk rating 1 to 5 | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 9,277 | | $ | — | | $ | — | | $ | 9,277 | |
| Risk rating 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 7 | — | | — | | — | | — | | — | | 36 | | — | | — | | 36 | |
| Risk rating 8 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 9 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 9,313 | | $ | — | | $ | — | | $ | 9,313 | |
| Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| Other consumer | | | | | | | | | |
| Risk rating 1 to 5 | $ | 502 | | $ | 2,229 | | $ | 1,175 | | $ | 884 | | $ | 709 | | $ | 676 | | $ | 536 | | $ | — | | $ | 6,711 | |
| Risk rating 6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 7 | 8 | | — | | — | | — | | — | | 6 | | 2 | | — | | 16 | |
| Risk rating 8 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Risk rating 9 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 510 | | $ | 2,229 | | $ | 1,175 | | $ | 884 | | $ | 709 | | $ | 682 | | $ | 538 | | $ | — | | $ | 6,727 | |
| Current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | 10 | | $ | 1 | | $ | — | | $ | — | | $ | — | | $ | 11 | |
| Total loans receivable | $ | 45,250 | | $ | 319,326 | | $ | 463,231 | | $ | 182,354 | | $ | 102,179 | | $ | 232,593 | | $ | 75,967 | | $ | 55 | | $ | 1,420,955 | |
| Total current period gross charge-offs | $ | — | | $ | — | | $ | — | | $ | 42 | | $ | 1 | | $ | 14 | | $ | — | | $ | — | | $ | 57 | |
Below is a summary of the unpaid principal balance of loans summarized by typeclass and credit quality risk rating as of December 31, 2017:2022:
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| | 1 to 5 | | 6 | | 7 | | 8 | | 9 | | TOTAL |
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| Commercial/Agricultural real estate: | | | | | | | | | | | | |
| Commercial real estate | | $ | 712,658 | | | $ | 5,771 | | | $ | 7,542 | | | $ | — | | | $ | — | | | $ | 725,971 | |
| Agricultural real estate | | 84,215 | | | 549 | | | 3,144 | | | — | | | — | | | 87,908 | |
| Multi-family real estate | | 208,908 | | | — | | | — | | | — | | | — | | | 208,908 | |
| Construction and land development | | 102,385 | | | — | | | 107 | | | — | | | — | | | 102,492 | |
| C&I/Agricultural operating: | | | | | | | | | | | | |
| Commercial and industrial | | 129,748 | | | 5,526 | | | 739 | | | — | | | — | | | 136,013 | |
| Agricultural operating | | 26,418 | | | 324 | | | 2,064 | | | — | | | — | | | 28,806 | |
| Residential mortgage: | | | | | | | | | | | | |
| Residential mortgage | | 101,730 | | | — | | | 3,659 | | | — | | | — | | | 105,389 | |
| Purchased HELOC loans | | 3,262 | | | — | | | — | | | — | | | — | | | 3,262 | |
| Consumer installment: | | | | | | | | | | | | |
| Originated indirect paper | | 10,190 | | | — | | | 46 | | | — | | | — | | | 10,236 | |
| | | | | | | | | | | | |
| Other consumer | | 7,132 | | | — | | | 18 | | | — | | | — | | | 7,150 | |
| Gross loans | | $ | 1,386,646 | | | $ | 12,170 | | | $ | 17,319 | | | $ | — | | | $ | — | | | $ | 1,416,135 | |
| Less: | | | | | | | | | | | | |
| Unearned net deferred fees and costs and loans in process | | | | | | | | | | | | (2,585) | |
| Unamortized discount on acquired loans | | | | | | | | | | | | (1,766) | |
| Allowance for loan losses | | | | | | | | | | | | (17,939) | |
| Loans receivable, net | | | | | | | | | | | | $ | 1,393,845 | |
Allowance for Credit Losses - On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial instruments and transitioned to the Current Expected Credit Loss (“CECL”) model to estimate losses based on the lifetime of the loan. Under the new methodology, the ACL is comprised of collectively evaluated and individually evaluated components. The allowance for credit losses (“ACL”) represents the Company’s best estimate of the reserve necessary to adequately account for probable losses expected over the remaining life of the assets. The provision for credit losses is the charge against current earnings that is determined by the Company as the amount needed to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit losses, and therefore the provision to be charged to current earnings, the Company relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The review process is directed by the overall lending policy and is intended to identify, at the earliest possible stage, the borrowers who might be facing financial difficulty. Factors considered by the Company in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and modifications, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates. The Company estimates the appropriate level of allowance for credit losses by evaluating loans collectively on a pooled basis when similar risk characteristics exist, and on an individual basis when management determines that a loan does not share similar risk characteristics with other loans.
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1 to 5 | | 6 | | 7 | | 8 | | 9 | | TOTAL |
| Originated Loans: | | | | | | | | | | | | |
| Residential real estate: | | | | | | | | | | | | |
| One to four family | | $ | 126,364 |
| | $ | — |
| | $ | 2,032 |
| | $ | — |
| | $ | — |
| | $ | 128,396 |
|
| Purchased HELOC loans | | 16,968 |
| | — |
| | — |
| | — |
| | — |
| | 16,968 |
|
| Commercial/Agricultural real estate: | | | | | | | | | | | | |
| Commercial real estate | | 110,614 |
| | 48 |
| | 153 |
| | — |
| | — |
| | 110,815 |
|
| Agricultural real estate | | 11,019 |
| | 483 |
| | 78 |
| | — |
| | — |
| | 11,580 |
|
| Multi-family real estate | | 30,722 |
| | — |
| | 146 |
| | — |
| | — |
| | 30,868 |
|
| Construction and land development | | 12,682 |
| | — |
| | — |
| | — |
| | — |
| | 12,682 |
|
| Consumer non-real estate: | | | | | | | | | | | | |
| Originated indirect paper | | 79,290 |
| | 8 |
| | 194 |
| | — |
| | — |
| | 79,492 |
|
| Purchased indirect paper | | 26,210 |
| | — |
| | — |
| | — |
| | — |
| | 26,210 |
|
| Other Consumer | | 14,386 |
| | — |
| | 79 |
| | — |
| | — |
| | 14,465 |
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| Commercial/Agricultural non-real estate: | | | | | | | | | | | | |
| Commercial non-real estate | | 39,498 |
| | — |
| | 96 |
| | — |
| | — |
| | 39,594 |
|
| Agricultural non-real estate | | 11,004 |
| | 708 |
| | 937 |
| | — |
| | — |
| | 12,649 |
|
| Total originated loans | | $ | 478,757 |
| | $ | 1,247 |
| | $ | 3,715 |
| | $ | — |
| | $ | — |
| | $ | 483,719 |
|
| Acquired Loans: | | | | | | | | | | | | |
| Residential real estate: | | | | | | | | | | | | |
| One to four family | | $ | 90,183 |
| | $ | 761 |
| | $ | 1,737 |
| | $ | — |
| | $ | — |
| | $ | 92,681 |
|
| Commercial/Agricultural real estate: | | | | | | | | | | | | |
| Commercial real estate | | 55,831 |
| | 1,737 |
| | 3,260 |
| | — |
| | — |
| | 60,828 |
|
| Agricultural real estate | | 47,860 |
| | 628 |
| | 4,959 |
| | — |
| | — |
| | 53,447 |
|
| Multi-family real estate | | 1,497 |
| | — |
| | 211 |
| | — |
| | — |
| | 1,708 |
|
| Construction and land development | | 6,615 |
| | — |
| | 541 |
| | — |
| | — |
| | 7,156 |
|
| Consumer non-real estate: | | | | | | | | | | | | |
| Other Consumer | | 4,710 |
| | — |
| | 67 |
| | — |
| | — |
| | 4,777 |
|
| Commercial/Agricultural non-real estate: | | | | | | | | | | | | |
| Commercial non-real estate | | 17,272 |
| | 423 |
| | 1,534 |
| | — |
| | — |
| | 19,229 |
|
| Agricultural non-real estate | | 10,944 |
| | 25 |
| | 92 |
| | — |
| | — |
| | 11,061 |
|
| Total acquired loans | | $ | 234,912 |
| | $ | 3,574 |
| | $ | 12,401 |
| | $ | — |
| | $ | — |
| | $ | 250,887 |
|
| Total Loans: | | | | | | | | | | | | |
| Residential real estate: | | | | | | | | | | | | |
| One to four family | | $ | 216,547 |
| | $ | 761 |
| | $ | 3,769 |
| | $ | — |
| | $ | — |
| | $ | 221,077 |
|
| Purchased HELOC loans | | 16,968 |
| | — |
| | — |
| | — |
| | — |
| | 16,968 |
|
| Commercial/Agricultural real estate: | | | | | | | | | | | | |
| Commercial real estate | | 166,445 |
| | 1,785 |
| | 3,413 |
| | — |
| | — |
| | 171,643 |
|
| Agricultural real estate | | 58,879 |
| | 1,111 |
| | 5,037 |
| | — |
| | — |
| | 65,027 |
|
| Multi-family real estate | | 32,219 |
| | — |
| | 357 |
| | — |
| | — |
| | 32,576 |
|
| Construction and land development | | 19,297 |
| | — |
| | 541 |
| | — |
| | — |
| | 19,838 |
|
| Consumer non-real estate: | | | | | | | | | | | | |
| Originated indirect paper | | 79,290 |
| | 8 |
| | 194 |
| | — |
| | — |
| | 79,492 |
|
| Purchased indirect paper | | 26,210 |
| | — |
| | — |
| | — |
| | — |
| | 26,210 |
|
| Other Consumer | | 19,096 |
| | — |
| | 146 |
| | — |
| | — |
| | 19,242 |
|
| Commercial/Agricultural non-real estate: | | | | | | | | | | | | |
| Commercial non-real estate | | 56,770 |
| | 423 |
| | 1,630 |
| | — |
| | — |
| | 58,823 |
|
| Agricultural non-real estate | | 21,948 |
| | 733 |
| | 1,029 |
| | — |
| | — |
| | 23,710 |
|
| Gross loans | | $ | 713,669 |
| | $ | 4,821 |
| | $ | 16,116 |
| | $ | — |
| | $ | — |
| | $ | 734,606 |
|
| Less: | | | | | | | | | | | | |
| Unearned net deferred fees and costs and loans in process | | | | | | | | | | | | 1,252 |
|
| Unamortized discount on acquired loans | | | | | | | | | | | | (4,940 | ) |
| Allowance for loan losses | | | | | | | | | | | | (5,859 | ) |
| Loans receivable, net | | | | | | | | | | | | $ | 725,059 |
|
Below is a summary of originatedThe following table presents the balance and activity in the allowance for credit losses (“ACL”) - loans by type and risk ratingportfolio segment as of September 30, 2017:March 31, 2023:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1 to 5 | | 6 | | 7 | | 8 | | 9 | | TOTAL |
| Originated Loans: | | | | | | | | | | | | |
| Residential real estate: | | | | | | | | | | | | |
| One to four family | | $ | 130,837 |
| | $ | — |
| | $ | 1,543 |
| | $ | — |
| | $ | — |
| | $ | 132,380 |
|
| Purchased HELOC loans | | 18,071 |
| | — |
| | — |
| | — |
| | — |
| | 18,071 |
|
| Commercial/Agricultural real estate: | | | | | | | | | | | | |
| Commercial real estate | | 96,953 |
| | 49 |
| | 153 |
| | — |
| | — |
| | 97,155 |
|
| Agricultural real estate | | 10,051 |
| | 497 |
| | 80 |
| | — |
| | — |
| | 10,628 |
|
| Multi-family real estate | | 24,338 |
| | — |
| | 148 |
| | — |
| | — |
| | 24,486 |
|
| Construction and land development | | 12,399 |
| | — |
| | — |
| | — |
| | — |
| | 12,399 |
|
| Consumer non-real estate: | | | | | | | | | | | | |
| Originated indirect paper | | 85,330 |
| | 8 |
| | 394 |
| | — |
| | — |
| | 85,732 |
|
| Purchased indirect paper | | 29,555 |
| | — |
| | — |
| | — |
| | — |
| | 29,555 |
|
| Other Consumer | | 14,361 |
| | — |
| | 135 |
| | — |
| | — |
| | 14,496 |
|
| Commercial/Agricultural non-real estate: | | | | | | | | | | | | |
| Commercial non-real estate | | 35,102 |
| | — |
| | 96 |
| | — |
| | — |
| | 35,198 |
|
| Agricultural non-real estate | | 10,798 |
| | 708 |
| | 987 |
| | — |
| | — |
| | 12,493 |
|
| Total originated loans | | $ | 467,795 |
| | $ | 1,262 |
| | $ | 3,536 |
| | $ | — |
| | $ | — |
| | $ | 472,593 |
|
| Acquired Loans: | | | | | | | | | | | | |
| Residential real estate: | | | | | | | | | | | | |
| One to four family | | $ | 94,932 |
| | $ | 873 |
| | $ | 1,378 |
| | $ | — |
| | $ | — |
| | $ | 97,183 |
|
| Commercial/Agricultural real estate: | | | | | | | | | | | | |
| Commercial real estate | | 57,795 |
| | 1,814 |
| | 3,198 |
| | — |
| | — |
| | 62,807 |
|
| Agricultural real estate | | 51,516 |
| | 266 |
| | 5,592 |
| | — |
| | — |
| | 57,374 |
|
| Multi-family real estate | | 1,519 |
| | — |
| | 223 |
| | — |
| | — |
| | 1,742 |
|
| Construction and land development | | 6,739 |
| | — |
| | 570 |
| | — |
| | — |
| | 7,309 |
|
| Consumer non-real estate: | | | | | | | | | | | | |
| Other Consumer | | 6,130 |
| | — |
| | 42 |
| | — |
| | — |
| | 6,172 |
|
| Commercial/Agricultural non-real estate: | | | | | | | | | | | | |
| Commercial non-real estate | | 18,257 |
| | 372 |
| | 1,424 |
| | — |
| | — |
| | 20,053 |
|
| Agricultural non-real estate | | 11,259 |
| | 28 |
| | 93 |
| | — |
| | — |
| | 11,380 |
|
| Total acquired loans | | $ | 248,147 |
| | $ | 3,353 |
| | $ | 12,520 |
| | $ | — |
| | $ | — |
| | $ | 264,020 |
|
| Total Loans: | | | | | | | | | | | | |
| Residential real estate: | | | | | | | | | | | | |
| One to four family | | $ | 225,769 |
| | $ | 873 |
| | $ | 2,921 |
| | $ | — |
| | $ | — |
| | $ | 229,563 |
|
| Purchased HELOC loans | | 18,071 |
| | — |
| | — |
| | — |
| | — |
| | 18,071 |
|
| Commercial/Agricultural real estate: | | | | | | | | | | | | |
| Commercial real estate | | 154,748 |
| | 1,863 |
| | 3,351 |
| | — |
| | — |
| | 159,962 |
|
| Agricultural real estate | | 61,567 |
| | 763 |
| | 5,672 |
| | — |
| | — |
| | 68,002 |
|
| Multi-family real estate | | 25,857 |
| | — |
| | 371 |
| | — |
| | — |
| | 26,228 |
|
| Construction and land development | | 19,138 |
| | — |
| | 570 |
| | — |
| | — |
| | 19,708 |
|
| Consumer non-real estate: | | | | | | | | | | | | |
| Originated indirect paper | | 85,330 |
| | 8 |
| | 394 |
| | — |
| | — |
| | 85,732 |
|
| Purchased indirect paper | | 29,555 |
| | — |
| | — |
| | — |
| | — |
| | 29,555 |
|
| Other Consumer | | 20,491 |
| | — |
| | 177 |
| | — |
| | — |
| | 20,668 |
|
| Commercial/Agricultural non-real estate: | | | | | | | | | | | | |
| Commercial non-real estate | | 53,359 |
| | 372 |
| | 1,520 |
| | — |
| | — |
| | 55,251 |
|
| Agricultural non-real estate | | 22,057 |
| | 736 |
| | 1,080 |
| | — |
| | — |
| | 23,873 |
|
| Gross loans | | $ | 715,942 |
| | $ | 4,615 |
| | $ | 16,056 |
| | $ | — |
| | $ | — |
| | $ | 736,613 |
|
| Less: | | | | | | | | | | | | |
| Unearned net deferred fees and costs and loans in process | | | | | | | | | | | | 1,471 |
|
| Unamortized discount on acquired loans | | | | | | | | | | | | (5,089 | ) |
| Allowance for loan losses | | | | | | | | | | | | (5,942 | ) |
| Loans receivable, net | | | | | | | | | | | | $ | 727,053 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial/Agricultural Real Estate | | C&I/Agricultural operating | | Residential Mortgage | | Consumer Installment | | Unallocated | | Total |
| Three months ended March 31, 2023 | | | | | | | | | | | |
| Allowance for Credit Losses - Loans: | | | | | | | | | | | |
| ACL - Loans, at beginning of period | $ | 14,085 | | | $ | 2,318 | | | $ | 599 | | | $ | 129 | | | $ | 808 | | | $ | 17,939 | |
| Cumulative effect of ASU 2016-13 adoption | 4,510 | | | (331) | | | 1,119 | | | 216 | | | (808) | | | 4,706 | |
| Charge-offs | (32) | | | — | | | (14) | | | (11) | | | — | | | (57) | |
| Recoveries | 3 | | | 15 | | | 4 | | | 12 | | | — | | | 34 | |
| Additions to ACL - Loans via provision for credit losses charged to operations | (70) | | | (154) | | | 292 | | | (11) | | | — | | | 57 | |
| ACL - Loans, at end of period | $ | 18,496 | | | $ | 1,848 | | | $ | 2,000 | | | $ | 335 | | | $ | — | | | $ | 22,679 | |
22Allowance for Credit Losses - Unfunded Commitments:
In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $1,530 at March 31, 2023 and $0 at December 31, 2022, classified in other liabilities on the consolidated balance sheets.
| | | | | | | | | | | | | | |
| | March 31, 2023 and Three Months Ended | | December 31, 2022 and Three Months Ended |
| ACL - Unfunded commitments - beginning of period | | $ | — | | | $ | — | |
| Cumulative effect of ASU 2016-13 adoption | | 1,537 | | | — | |
| Reductions to ACL - Unfunded commitments via provision for credit losses charged to operations | | (7) | | | — | |
| ACL - Unfunded commitments - End of period | | $ | 1,530 | | | $ | — | |
Provision for credit losses - The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments (including loans and off-balance sheet credit exposures) after net charge-offs have been deducted to bring the ACL to a level that, in managements judgement, is necessary to absorb expected credit losses over the lives of the respective financial instruments. The following table presents the components of the provision for credit losses.
| | | | | | | | |
| | March 31, 2023 and Three Months Ended |
| Provision for credit losses on: | | |
| Loans | | $ | 57 | |
| Unfunded commitments | | (7) | |
| Total provision for credit losses | | $ | 50 | |
Allowance for Loan Losses- The ALL representsPrior to the adoption of ASU 2016-13, the Allowance for Loan Losses (“ALL”) represented management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio. Estimating the amount of the ALL requiresrequired 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 behave been susceptible to significant change.
There arewere many factors affecting the ALL; some arewere quantitative, while others requirerequired qualitative judgment. The process for determining the ALL (which management believesbelieved adequately considersconsidered potential factors which resultresulted in
probable credit losses), includesincluded subjective elements and, therefore, may behave been susceptible to significant change. To the extent actual outcomes differdiffered from management estimates, additional provision for loan losses could behave been required that could have adversely affectaffected the Company’s earnings or financial position in future periods. Allocations of the ALL may behave been made for specific loans but the entire ALL iswas available for any loan that, in management’s judgment, should behave been charged-off or for which an actual loss iswas realized.
As an integral part of their examination process, various regulatory agencies also reviewreviewed the Bank’s ALL. Such agencies may requirehave required that changes in the ALL be recognized when such regulators’ credit evaluations differdiffered 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/Agricultural Real Estate | | C&I/Agricultural operating | | Residential Mortgage | | Consumer Installment | | Unallocated | | Total |
| Three months ended March 31, 2022 | | | | | | | | | | | |
| Allowance for Loan Losses: | | | | | | | | | | | |
| Beginning balance, January 1, 2022 | $ | 12,354 | | | $ | 1,959 | | | $ | 518 | | | $ | 225 | | | $ | 774 | | | $ | 15,830 | |
| Charge-offs | (35) | | | (63) | | | — | | | (9) | | | — | | | (107) | |
| Recoveries | 3 | | | 10 | | | 1 | | | 10 | | | — | | | 24 | |
| Provision | 72 | | | 198 | | | (59) | | | (66) | | | 8 | | | 153 | |
| | | | | | | | | | | |
| Total allowance on originated loans | $ | 12,394 | | | $ | 2,104 | | | $ | 460 | | | $ | 160 | | | $ | 782 | | | $ | 15,900 | |
| Purchased credit impaired loans | — | | | — | | | — | | | — | | | — | | | — | |
| Other acquired loans | | | | | | | | | | | |
| Beginning balance, January 1, 2022 | 856 | | | 69 | | | 130 | | | 28 | | | — | | | 1,083 | |
| Charge-offs | — | | | — | | | (12) | | | — | | | — | | | (12) | |
| Recoveries | — | | | — | | | — | | | — | | | — | | | — | |
| Provision | (67) | | | (11) | | | (56) | | | (19) | | | — | | | (153) | |
| | | | | | | | | | | |
| Total allowance on other acquired loans | 789 | | | 58 | | | 62 | | | 9 | | | — | | | 918 | |
| Total allowance on acquired loans | 789 | | | 58 | | | 62 | | | 9 | | | — | | | 918 | |
| Ending balance, March 31, 2022 | $ | 13,183 | | | $ | 2,162 | | | $ | 522 | | | $ | 169 | | | $ | 782 | | | $ | 16,818 | |
| Allowance for Loan Losses at March 31, 2022: | | | | | | | | | | | |
| Amount of allowance for loan losses arising from loans individually evaluated for impairment | $ | 1,280 | | | $ | 373 | | | $ | 69 | | | $ | — | | | $ | — | | | $ | 1,722 | |
| Amount of allowance for loan losses arising from loans collectively evaluated for impairment | $ | 11,903 | | | $ | 1,789 | | | $ | 453 | | | $ | 169 | | | $ | 782 | | | $ | 15,096 | |
| Loans Receivable as of March 31, 2022 | | | | | | | | | | | |
| Ending balance of originated loans | $ | 890,440 | | | $ | 134,513 | | | $ | 63,362 | | | $ | 22,350 | | | $ | — | | | $ | 1,110,665 | |
| Ending balance of purchased credit-impaired loans | 8,672 | | | 1,023 | | | 1,024 | | | — | | | — | | | 10,719 | |
| Ending balance of other acquired loans | 133,745 | | | 16,314 | | | 23,874 | | | 349 | | | — | | | 174,282 | |
| Ending balance of loans | $ | 1,032,857 | | | $ | 151,850 | | | $ | 88,260 | | | $ | 22,699 | | | $ | — | | | $ | 1,295,666 | |
| Ending balance: individually evaluated for impairment | $ | 20,597 | | | $ | 6,605 | | | $ | 6,838 | | | $ | 210 | | | $ | — | | | $ | 34,250 | |
| Ending balance: collectively evaluated for impairment | $ | 1,012,260 | | | $ | 145,245 | | | $ | 81,422 | | | $ | 22,489 | | | $ | — | | | $ | 1,261,416 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Residential Real Estate | | Commercial/Agriculture Real Estate | | Consumer Non-real Estate | | Commercial/Agricultural Non-real Estate | | Unallocated | | Total |
| Three Months Ended December 31, 2017: | | | | | | | | | | | |
| Allowance for Loan Losses: | | | | | | | | | | | |
| Beginning balance, October 1, 2017 | $ | 1,458 |
| | $ | 2,523 |
| | $ | 936 |
| | $ | 897 |
| | $ | 128 |
| | $ | 5,942 |
|
| Charge-offs | (24 | ) | | (1 | ) | | (193 | ) | | — |
| | — |
| | (218 | ) |
| Recoveries | 13 |
| | — |
| | 22 |
| | — |
| | — |
| | 35 |
|
| Provision | — |
| | 75 |
| | 25 |
| | — |
| | — |
| | 100 |
|
| Allowance allocation adjustment | (8 | ) | | 7 |
| | 120 |
| | (17 | ) | | (102 | ) | | — |
|
| Total Allowance on originated loans | $ | 1,439 |
| | $ | 2,604 |
| | $ | 910 |
| | $ | 880 |
| | $ | 26 |
| | $ | 5,859 |
|
| Purchased credit impaired loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other acquired loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Allowance on acquired loans | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Ending balance, December 31, 2017 | $ | 1,439 |
| | $ | 2,604 |
| | $ | 910 |
| | $ | 880 |
| | $ | 26 |
| | $ | 5,859 |
|
| Allowance for Loan Losses at December 31, 2017: | | | | | | | | | | | |
| Amount of allowance for loan losses arising from loans individually evaluated for impairment | $ | 223 |
| | $ | — |
| | $ | 27 |
| | $ | 49 |
| | $ | — |
| | $ | 299 |
|
| Amount of allowance for loan losses arising from loans collectively evaluated for impairment | $ | 1,216 |
| | $ | 2,604 |
| | $ | 883 |
| | $ | 831 |
| | $ | 26 |
| | $ | 5,560 |
|
| Loans Receivable as of December 31, 2017: | | | | | | | | | | | — |
|
| Ending balance of originated loans | $ | 145,735 |
| | $ | 165,960 |
| | $ | 121,033 |
| | $ | 52,243 |
| | $ | — |
| | $ | 484,971 |
|
| Ending balance of purchased credit-impaired loans | 570 |
| | 7,223 |
| | — |
| | 3,131 |
| | — |
| | 10,924 |
|
| Ending balance of other acquired loans | 91,028 |
| | 113,163 |
| | 4,725 |
| | 26,107 |
| | — |
| | 235,023 |
|
| Ending balance of loans | $ | 237,333 |
| | $ | 286,346 |
| | $ | 125,758 |
| | $ | 81,481 |
| | $ | — |
| | $ | 730,918 |
|
| Ending balance: individually evaluated for impairment | $ | 5,653 |
| | $ | 213 |
| | $ | 268 |
| | $ | 746 |
| | $ | — |
| | $ | 6,880 |
|
| Ending balance: collectively evaluated for impairment | $ | 231,680 |
| | $ | 286,133 |
| | $ | 125,490 |
| | $ | 80,735 |
| | $ | — |
| | $ | 724,038 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial/Agricultural Real Estate | | C&I/Agricultural operating | | Residential Mortgage | | Consumer Installment | | Unallocated | | Total |
| Allowance for Loan Losses at December 31, 2022: | | | | | | | | | | | |
| Amount of allowance for loan losses arising from loans individually evaluated for impairment | $ | 519 | | | $ | 249 | | | $ | 48 | | | $ | 10 | | | $ | — | | | $ | 826 | |
| Amount of allowance for loan losses arising from loans collectively evaluated for impairment | $ | 13,566 | | | $ | 2,069 | | | $ | 551 | | | $ | 119 | | | $ | 808 | | | $ | 17,113 | |
| Loans Receivable as of December 31, 2022: | | | | | | | | | | | |
| Ending balance of originated loans | $ | 1,017,529 | | | $ | 150,239 | | | $ | 88,045 | | | $ | 17,130 | | | $ | — | | | $ | 1,272,943 | |
| Ending balance of purchased credit-impaired loans | 5,748 | | | 362 | | | 890 | | | — | | | — | | | 7,000 | |
| Ending balance of other acquired loans | 102,002 | | | 14,218 | | | 19,716 | | | 256 | | | — | | | 136,192 | |
| Ending balance of loans | $ | 1,125,279 | | | $ | 164,819 | | | $ | 108,651 | | | $ | 17,386 | | | $ | — | | | $ | 1,416,135 | |
| Ending balance: individually evaluated for impairment | $ | 16,874 | | | $ | 3,292 | | | $ | 5,998 | | | $ | 755 | | | $ | — | | | $ | 26,919 | |
| Ending balance: collectively evaluated for impairment | $ | 1,108,405 | | | $ | 161,527 | | | $ | 102,653 | | | $ | 16,631 | | | $ | — | | | $ | 1,389,216 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Residential Real Estate | | Commercial/Agriculture Real Estate | | Consumer Non-real Estate | | Commercial/Agricultural Non-real Estate | | Unallocated | | Total |
| Three months ended December 31, 2016: | | | | | | | | | | | |
| Allowance for Loan Losses: | | | | | | | | | | | |
| Beginning balance, October 1, 2016 | $ | 2,039 |
| | $ | 1,883 |
| | $ | 1,466 |
| | $ | 652 |
| | $ | 28 |
| | $ | 6,068 |
|
| Charge-offs | (43 | ) | | — |
| | (172 | ) | | — |
| | — |
| | (215 | ) |
| Recoveries | 3 |
| | — |
| | 61 |
| | — |
| | — |
| | 64 |
|
| Provision | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Allowance allocation adjustment | (187 | ) | | (11 | ) | | (17 | ) | | 19 |
| | 196 |
| | — |
|
| Total Allowance on originated loans | $ | 1,812 |
| | $ | 1,872 |
| | $ | 1,338 |
| | $ | 671 |
| | $ | 224 |
| | $ | 5,917 |
|
| Purchased credit impaired loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other acquired loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Allowance on acquired loans | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Ending balance, December 31, 2016 | $ | 1,812 |
| | $ | 1,872 |
| | $ | 1,338 |
| | $ | 671 |
| | $ | 224 |
| | $ | 5,917 |
|
| Allowance for Loan Losses at December 31, 2016: | | | | | | | | | | | |
| Amount of allowance for loan losses arising from loans individually evaluated for impairment | $ | 399 |
| | $ | — |
| | $ | 46 |
| | $ | 32 |
| | $ | — |
| | $ | 477 |
|
| Amount of allowance for loan losses arising from loans collectively evaluated for impairment | $ | 1,413 |
| | $ | 1,872 |
| | $ | 1,292 |
| | $ | 639 |
| | $ | 224 |
| | $ | 5,440 |
|
| Loans Receivable as of December 31, 2016: | | | | | | | | | | |
|
| Ending balance of originated loans | $ | 149,450 |
| | $ | 95,889 |
| | $ | 175,250 |
| | $ | 30,424 |
| | $ | — |
| | $ | 451,013 |
|
| Ending balance of purchased credit-impaired loans | 256 |
| | 2,097 |
| | 4 |
| | 867 |
| | — |
| | 3,224 |
|
| Ending balance of other acquired loans | 24,628 |
| | 53,190 |
| | 600 |
| | 16,249 |
| | — |
| | 94,667 |
|
| Ending balance of loans | $ | 174,334 |
| | $ | 151,176 |
| | $ | 175,854 |
| | $ | 47,540 |
| | $ | — |
| | $ | 548,904 |
|
| Ending balance: individually evaluated for impairment | $ | 4,459 |
| | $ | — |
| | $ | 609 |
| | $ | 179 |
| | $ | — |
| | $ | 5,247 |
|
| Ending balance: collectively evaluated for impairment | $ | 169,875 |
| | $ | 151,176 |
| | $ | 175,245 |
| | $ | 47,361 |
| | $ | — |
| | $ | 543,657 |
|
The Bank has originated substantially all loans currently recorded on the Company’s accompanying Consolidated Balance Sheet, except as noted below.
In February 2016, the Bank selectively purchased loans from Central Bank in Rice Lake and Barron, Wisconsin in the amount of $16,363. In May 2016, the Bank acquired loans from Community Bank of Northern Wisconsin, headquartered in Rice Lake, Wisconsin totaling $111,740. In August 2017, the Bank acquired loans from Wells Federal, headquartered in Wells, Minnesota totaling $189,077.
During October 2012, the Bank entered into an agreement to purchase short term consumer loans from a third party on an ongoing basis. As part of the servicer agreement entered into in connection with this purchase agreement, the third party seller agreed to purchase or substitute performing consumer loans for all contracts that become 120 days past due. Pursuant to the ongoing loan purchase agreement, a restricted reserve account was established at 3% of the outstanding consumer loan balances purchased up to a maximum of $1,000, with such percentage amount of the loans being deposited into a segregated reserve account. The funds in the reserve account are to be released to compensate the Bank for any purchased loans that are not purchased back by the seller or substituted with performing loans and are ultimately charged off by the Bank. During the first quarter of fiscal 2015, the Board of Directors increased the limit of these purchased consumer loans to a maximum of $50,000. As of December 31, 2017, the balance of these purchased consumer loans was $26,210 compared to $29,555 as of September 30, 2017. As of September 30, 2017, new purchases from this third party have been terminated. The balance in the cash reserve account at December 31, 2017 was $816, which is included in Deposits on the accompanying Consolidated Balance Sheet. To date, the Company has not charged off or experienced losses related to the purchased loans.
The weighted average rate earned on these purchased consumer loans was 4.14% as of December 31, 2017. From March 2014 through December 2015, the rate earned for all new loan originations of these purchased consumer loans was 4.00%. As of January 2016, new loans purchased were at an interest rate of 4.25% due to the increase in the Prime Rate.
Loans receivable by loan type as of the end of the periods shown below were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Residential Real Estate | | Commercial/Agriculture Real Estate Loans | | Consumer non-Real Estate | | Commercial/Agriculture non-Real Estate | | Totals |
| | December 31, 2017 | | September 30, 2017 | | December 31, 2017 | | September 30, 2017 | | December 31, 2017 | | September 30, 2017 | | December 31, 2017 | | September 30, 2017 | | December 31, 2017 | | September 30, 2017 |
| Performing loans | | | | | | | | | | | | | | | | | | | |
| Performing TDR loans | $ | 3,076 |
| | $ | 3,085 |
| | $ | 2,143 |
| | $ | 1,890 |
| | $ | 157 |
| | $ | 167 |
| | $ | 561 |
| | $ | 88 |
| | $ | 5,937 |
| | $ | 5,230 |
|
| Performing loans other | 231,539 |
| | 242,198 |
| | 281,903 |
| | 268,619 |
| | 125,217 |
| | 131,695 |
| | 79,195 |
| | 77,213 |
| | 717,854 |
| | 719,725 |
|
| Total performing loans | 234,615 |
| | 245,283 |
| | 284,046 |
| | 270,509 |
| | 125,374 |
| | 131,862 |
| | 79,756 |
| | 77,301 |
| | 723,791 |
| | 724,955 |
|
| | | | | | | | | | | | | | | | | | | | |
| Nonperforming loans (1) | | | | | | | | | | | | | | | | | | | |
| Nonperforming TDR loans | 591 |
| | 593 |
| | 556 |
| | — |
| | 9 |
| | 28 |
| | 170 |
| | — |
| | 1,326 |
| | 621 |
|
| Nonperforming loans other | 2,127 |
| | 1,758 |
| | 1,744 |
| | 3,391 |
| | 375 |
| | 447 |
| | 1,555 |
| | 1,823 |
| | 5,801 |
| | 7,419 |
|
| Total nonperforming loans | 2,718 |
| | 2,351 |
| | 2,300 |
| | 3,391 |
| | 384 |
| | 475 |
| | 1,725 |
| | 1,823 |
| | 7,127 |
| | 8,040 |
|
| Total loans | $ | 237,333 |
| | $ | 247,634 |
| | $ | 286,346 |
| | $ | 273,900 |
| | $ | 125,758 |
| | $ | 132,337 |
| | $ | 81,481 |
| | $ | 79,124 |
| | $ | 730,918 |
| | $ | 732,995 |
|
| | | | | | | | | | | | | | | | | | | | | |
(1) | Nonperforming loans are either 90+ days past due or nonaccrual.
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
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An aging analysis of the Company’s residentialcommercial/agricultural real estate, commercial/agriculture real estate,C&I, agricultural operating, residential mortgage, consumer and other loansinstallment and purchased third party loans as of March 31, 2023 and December 31, 2017 and September 30, 2017,2022, respectively, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Loan balances at amortized cost) | 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 |
| March 31, 2023 | | | | | | | | | | | | | | | |
| Commercial/Agricultural real estate: | | | | | | | | | | | | | | | |
| Commercial real estate | $ | 684 | | | $ | — | | | $ | — | | | $ | 684 | | | $ | 5,514 | | | $ | 6,198 | | | $ | 718,487 | | | $ | 724,685 | |
| Agricultural real estate | — | | | — | | | — | | | — | | | 2,496 | | | 2,496 | | | 88,210 | | | 90,706 | |
| Multi-family real estate | — | | | — | | | — | | | — | | | — | | | — | | | 207,686 | | | 207,686 | |
| Construction and land development | 94 | | | — | | | — | | | 94 | | | — | | | 94 | | | 114,194 | | | 114,288 | |
| C&I/Agricultural operating: | | | | | | | | | | | | | | | |
| Commercial and industrial | — | | | — | | | — | | | — | | | 452 | | | 452 | | | 129,965 | | | 130,417 | |
| | | | | | | | | | | | | | | |
| Agricultural operating | 15 | | | — | | | — | | | 15 | | | 794 | | | 809 | | | 23,359 | | | 24,168 | |
| Residential mortgage: | | | | | | | | | | | | | | | |
| Residential mortgage | 1,313 | | | 160 | | | 221 | | | 1,694 | | | 1,131 | | | 2,825 | | | 106,934 | | | 109,759 | |
| Purchased HELOC loans | — | | | — | | | — | | | — | | | — | | | — | | | 3,206 | | | 3,206 | |
| Consumer installment: | | | | | | | | | | | | | | | |
| Originated indirect paper | 24 | | | — | | | — | | | 24 | | | 21 | | | 45 | | | 9,268 | | | 9,313 | |
| | | | | | | | | | | | | | | |
| Other consumer | 24 | | | 2 | | | 3 | | | 29 | | | 2 | | | 31 | | | 6,696 | | | 6,727 | |
| Total | $ | 2,154 | | | $ | 162 | | | $ | 224 | | | $ | 2,540 | | | $ | 10,410 | | | $ | 12,950 | | | $ | 1,408,005 | | | $ | 1,420,955 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| (Loan balances at unpaid principal balance) | 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 |
| December 31, 2022 | | | | | | | | | | | | | | | |
| Commercial/Agricultural real estate: | | | | | | | | | | | | | | | |
| Commercial real estate | $ | 202 | | | $ | 88 | | | $ | — | | | $ | 290 | | | $ | 5,736 | | | $ | 6,026 | | | $ | 719,945 | | | $ | 725,971 | |
| Agricultural real estate | 4,992 | | | — | | | — | | | 4,992 | | | 2,742 | | | 7,734 | | | 80,174 | | | 87,908 | |
| Multi-family real estate | — | | | — | | | — | | | — | | | — | | | — | | | 208,908 | | | 208,908 | |
| Construction and land development | 3,975 | | | — | | | — | | | 3,975 | | | — | | | 3,975 | | | 98,517 | | | 102,492 | |
| C&I/Agricultural operating: | | | | | | | | | | | | | | | |
| Commercial and industrial | — | | | 26 | | | — | | | 26 | | | 552 | | | 578 | | | 135,435 | | | 136,013 | |
| Agricultural operating | 826 | | | — | | | — | | | 826 | | | 890 | | | 1,716 | | | 27,090 | | | 28,806 | |
| Residential mortgage: | | | | | | | | | | | | | | | |
| Residential mortgage | 767 | | | 479 | | | 236 | | | 1,482 | | | 1,253 | | | 2,735 | | | 102,654 | | | 105,389 | |
| Purchased HELOC loans | — | | | — | | | — | | | — | | | — | | | — | | | 3,262 | | | 3,262 | |
| Consumer installment: | | | | | | | | | | | | | | | |
| Originated indirect paper | 15 | | | — | | | — | | | 15 | | | 27 | | | 42 | | | 10,194 | | | 10,236 | |
| | | | | | | | | | | | | | | |
| Other consumer | 39 | | | 2 | | | 10 | | | 51 | | | 4 | | | 55 | | | 7,095 | | | 7,150 | |
| Total | $ | 10,816 | | | $ | 595 | | | $ | 246 | | | $ | 11,657 | | | $ | 11,204 | | | $ | 22,861 | | | $ | 1,393,274 | | | $ | 1,416,135 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 89 Days | | Total Past Due | | Current | | Total Loans | | Nonaccrual Loans | | Recorded
Investment > 89
Days and
Accruing |
| December 31, 2017 | | | | | | | | | | | | | | | |
| Residential real estate: | | | | | | | | | | | | | | | |
| One to four family | $ | 3,312 |
| | $ | 1,174 |
| | $ | 1,634 |
| | $ | 6,120 |
| | $ | 214,957 |
| | $ | 221,077 |
| | $ | 2,253 |
| | $ | 466 |
|
| Purchased HELOC loans | 438 |
| | — |
| | — |
| | 438 |
| | 16,530 |
| | 16,968 |
| | — |
| | — |
|
| Commercial/Agricultural real estate: | | | | | | | | | | | | | | | |
| Commercial real estate | 1,530 |
| | — |
| | 103 |
| | 1,633 |
| | 170,010 |
| | 171,643 |
| | 321 |
| | — |
|
| Agricultural real estate | 589 |
| | — |
| | 1,331 |
| | 1,920 |
| | 63,107 |
| | 65,027 |
| | 1,742 |
| | — |
|
| Multi-family real estate | — |
| | — |
| | 146 |
| | 146 |
| | 32,430 |
| | 32,576 |
| | 146 |
| | — |
|
| Construction and land development | 1,963 |
| | 438 |
| | 27 |
| | 2,428 |
| | 17,410 |
| | 19,838 |
| | 91 |
| | — |
|
| Consumer non-real estate: | | | | | | | | | | | | | | | |
| Originated indirect paper | 415 |
| | 19 |
| | 87 |
| | 521 |
| | 78,971 |
| | 79,492 |
| | 81 |
| | 42 |
|
| Purchased indirect paper | 595 |
| | 316 |
| | 211 |
| | 1,122 |
| | 25,088 |
| | 26,210 |
| | — |
| | 211 |
|
| Other Consumer | 199 |
| | 38 |
| | 32 |
| | 269 |
| | 18,973 |
| | 19,242 |
| | 29 |
| | 20 |
|
| Commercial/Agricultural non-real estate: | | | | | | | | | | | | | | | |
| Commercial non-real estate | 488 |
| | — |
| | 96 |
| | 584 |
| | 58,239 |
| | 58,823 |
| | 1,537 |
| | — |
|
| Agricultural non-real estate | 109 |
| | 114 |
| | 91 |
| | 314 |
| | 23,396 |
| | 23,710 |
| | 188 |
| | — |
|
| Total | $ | 9,638 |
| | $ | 2,099 |
| | $ | 3,758 |
| | $ | 15,495 |
| | $ | 719,111 |
| | $ | 734,606 |
| | $ | 6,388 |
| | $ | 739 |
|
| September 30, 2017 | | | | | | | | | | | | | | | |
| Residential real estate: | | | | | | | | | | | | | | | |
| One to four family | $ | 2,811 |
| | $ | 393 |
| | $ | 1,228 |
| | $ | 4,432 |
| | $ | 225,131 |
| | $ | 229,563 |
| | $ | 2,200 |
| | $ | 151 |
|
| Purchased HELOC loans | 250 |
| | — |
| | — |
| | 250 |
| | 17,821 |
| | 18,071 |
| | — |
| | — |
|
| Commercial/Agricultural real estate: | | | | | | | | | | | | | | | |
| Commercial real estate | 332 |
| | 70 |
| | 282 |
| | 684 |
| | 159,278 |
| | 159,962 |
| | 572 |
| | — |
|
| Agricultural real estate | 57 |
| | — |
| | 2,405 |
| | 2,462 |
| | 65,540 |
| | 68,002 |
| | 2,723 |
| | 96 |
|
| Multi-family real estate | — |
| | — |
| | — |
| | — |
| | 26,228 |
| | 26,228 |
| | — |
| | — |
|
| Construction and land development | — |
| | — |
| | — |
| | — |
| | 19,708 |
| | 19,708 |
| | — |
| | — |
|
| Consumer non-real estate: | | | | | | | | | | | | | | | |
| Originated indirect paper | 426 |
| | 112 |
| | 123 |
| | 661 |
| | 85,071 |
| | 85,732 |
| | 74 |
| | 80 |
|
| Purchased indirect paper | 601 |
| | 305 |
| | 221 |
| | 1,127 |
| | 28,428 |
| | 29,555 |
| | — |
| | 221 |
|
| Other Consumer | 120 |
| | 79 |
| | 57 |
| | 256 |
| | 20,412 |
| | 20,668 |
| | 76 |
| | 25 |
|
| Commercial/Agricultural non-real estate: | | | | | | | | | | | | | | | |
| Commercial non-real estate | 75 |
| | 23 |
| | 156 |
| | 254 |
| | 54,997 |
| | 55,251 |
| | 1,618 |
| | — |
|
| Agricultural non-real estate | 757 |
| | — |
| | 120 |
| | 877 |
| | 22,996 |
| | 23,873 |
| | 189 |
| | 16 |
|
| Total | $ | 5,429 |
| | $ | 982 |
| | $ | 4,592 |
| | $ | 11,003 |
| | $ | 725,610 |
| | $ | 736,613 |
| | $ | 7,452 |
| | $ | 589 |
|
Nonaccrual Loans - The following table presents the Company’s nonaccrual loans at March 31, 2023 with no allowance for credit losses and interest income that would have been recorded under the original terms of such nonaccrual loans:
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | Total Nonaccrual Loans | | Nonaccrual with no Allowance for Credit Losses | | Interest Income Not Recorded for Nonaccrual loans |
| Commercial/Agricultural real estate: | | | | | |
| Commercial real estate | $ | 5,514 | | | $ | 636 | | | $ | 20 | |
| Agricultural real estate | 2,496 | | | 1,252 | | | 69 | |
| Multi-family real estate | — | | | — | | | — | |
| Construction and land development | — | | | — | | | — | |
| C&I/Agricultural operating: | | | | | |
| Commercial and industrial | 452 | | | 15 | | | 8 | |
| | | | | |
| Agricultural operating | 794 | | | 358 | | | 55 | |
| Residential mortgage: | | | | | |
| Residential mortgage | 1,131 | | | 825 | | | 12 | |
| Purchased HELOC loans | — | | | — | | | — | |
| Consumer installment: | | | | | |
| Originated indirect paper | 21 | | | 21 | | | 1 | |
| | | | | |
| Other consumer | 2 | | | 2 | | | — | |
| Total | $ | 10,410 | | | $ | 3,109 | | | $ | 165 | |
| | | | | |
Collateral Dependent Loans - A loan is considered to be collateral dependent when, based upon management’assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following table presents collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Collateral Type | | |
| March 31, 2023 | Real Estate | | Other Assets | | Total | | Without an Allowance | | With an Allowance | | Allowance Allocation |
| Commercial/Agricultural real estate: | | | | | | | | | | | |
| Commercial real estate | $ | 7,810 | | | $ | — | | | $ | 7,810 | | | $ | 2,864 | | | $ | 4,946 | | | $ | 31 | |
| Agricultural real estate | 2,793 | | | — | | | 2,793 | | | 1,551 | | | 1,242 | | | 418 | |
| Multi-family real estate | — | | | — | | | — | | | — | | | — | | | — | |
| Construction and land development | 94 | | | — | | | 94 | | | 94 | | | — | | | — | |
| C&I/Agricultural operating: | | | | | | | | | | | |
| Commercial and industrial | — | | | 478 | | | 478 | | | 38 | | | 440 | | | 220 | |
| | | | | | | | | | | |
| Agricultural operating | — | | | 1,879 | | | 1,879 | | | 1,444 | | | 435 | | | 29 | |
| Residential mortgage: | | | | | | | | | | | |
| Residential mortgage | 3,100 | | | — | | | 3,100 | | | 2,625 | | | 475 | | | 97 | |
| Purchased HELOC loans | — | | | — | | | — | | | — | | | — | | | — | |
| Consumer installment: | | | | | | | | | | | |
| Originated indirect paper | — | | | 36 | | | 36 | | | — | | | 36 | | | — | |
| | | | | | | | | | | |
| Other consumer | — | | | 16 | | | 16 | | | 16 | | | — | | | — | |
| Total | $ | 13,797 | | | $ | 2,409 | | | $ | 16,206 | | | $ | 8,632 | | | $ | 7,574 | | | $ | 795 | |
| | | | | | | | | | | |
There were no outstanding commitments to borrowers experiencing financial difficulty as of March 31, 2023. There were unused lines of credit totaling $71 on loans with borrowers experiencing financial difficulties as of March 31, 2023.
At December 31, 2017,2022, the Company has identified impairedindividually evaluated loans for impairment with a recorded investment of $24,266,$26,823, consisting of $7,263(1) $7,000 PCI loans, with a carrying amount of $6,904; (2) $7,018 TDR loans, $10,923 purchased credit impaired loans,net of TDR PCI loans; and $6,080(3) $12,901 of substandard non-TDR, loans, which includes $3,202 of non-PCI acquired loans. The $24,266 total$26,823 recorded investment of impaired loans individually evaluated for impairment includes $2,631 of performing TDR loans. At September 30, 2017, the Company identified impaired loans of $24,359, consisting of $5,851 TDR loans, $12,035 purchased credit impaired loans, and $6,473 substandard non-TDR loans, which includes $2,387 of non-PCI acquired loans. The $24,359 total of impaired loans includes $5,230$5,171 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 individually evaluated for impairment as of December 31, 20172022 and September 30, 2017March 31, 2022 was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Twelve Months Ended |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
| December 31, 2022 | | | | | | | | | |
| With No Related Allowance Recorded: | | | | | | | | | |
| Commercial/Agricultural real estate | $ | 9,741 | | | $ | 9,766 | | | $ | — | | | $ | 13,657 | | | $ | 549 | |
| C&I/Agricultural operating | 2,744 | | | 2,754 | | | — | | | 4,467 | | | 200 | |
| Residential mortgage | 5,846 | | | 5,907 | | | — | | | 6,304 | | | 276 | |
| Consumer installment | 745 | | | 745 | | | — | | | 307 | | | 5 | |
| Total | $ | 19,076 | | | $ | 19,172 | | | $ | — | | | $ | 24,735 | | | $ | 1,030 | |
| With An Allowance Recorded: | | | | | | | | | |
| Commercial/Agricultural real estate | $ | 7,108 | | | $ | 7,108 | | | $ | 519 | | | $ | 6,028 | | | $ | 273 | |
| C&I/Agricultural operating | 538 | | | 538 | | | 249 | | | 273 | | | 48 | |
| Residential mortgage | 91 | | | 91 | | | 48 | | | 298 | | | 65 | |
| Consumer installment | 10 | | | 10 | | | 10 | | | 2 | | | 2 | |
| Total | $ | 7,747 | | | $ | 7,747 | | | $ | 826 | | | $ | 6,601 | | | $ | 388 | |
| December 31, 2022 Totals | | | | | | | | | |
| Commercial/Agricultural real estate | $ | 16,849 | | | $ | 16,874 | | | $ | 519 | | | $ | 19,685 | | | $ | 822 | |
| C&I/Agricultural operating | 3,282 | | | 3,292 | | | 249 | | | 4,740 | | | 248 | |
| Residential mortgage | 5,937 | | | 5,998 | | | 48 | | | 6,602 | | | 341 | |
| Consumer installment | 755 | | | 755 | | | 10 | | | 309 | | | 7 | |
| Total | $ | 26,823 | | | $ | 26,919 | | | $ | 826 | | | $ | 31,336 | | | $ | 1,418 | |
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| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
| December 31, 2017 | | | | | | | | | |
| With No Related Allowance Recorded: | | | | | | | | | |
| Residential real estate | $ | 5,338 |
| | $ | 5,338 |
| | $ | — |
| | $ | 4,677 |
| | $ | 242 |
|
| Commercial/agriculture real estate | 11,703 |
| | 11,703 |
| | — |
| | 12,164 |
| | 6 |
|
| Consumer non-real estate | 127 |
| | 127 |
| | — |
| | 280 |
| | 21 |
|
| Commercial/agricultural non-real estate | 5,305 |
| | 5,305 |
| | — |
| | 5,550 |
| | 8 |
|
| Total | $ | 22,473 |
| | $ | 22,473 |
| | $ | — |
| | $ | 22,671 |
| | $ | 277 |
|
| With An Allowance Recorded: | | | | | | | | | |
| Residential real estate | $ | 1,556 |
| | $ | 1,556 |
| | $ | 223 |
| | $ | 1,377 |
| | $ | 66 |
|
| Commercial/agriculture real estate | — |
| | — |
| | — |
| | — |
| | — |
|
| Consumer non-real estate | 141 |
| | 141 |
| | 28 |
| | 205 |
| | — |
|
| Commercial/agricultural non-real estate | 96 |
| | 96 |
| | 49 |
| | 60 |
| | — |
|
| Total | $ | 1,793 |
| | $ | 1,793 |
| | $ | 300 |
| | $ | 1,642 |
| | $ | 66 |
|
| December 31, 2017 Totals: | | | | | | | | | |
| Residential real estate | $ | 6,894 |
| | $ | 6,894 |
| | $ | 223 |
| | $ | 6,054 |
| | $ | 308 |
|
| Commercial/agriculture real estate | 11,703 |
| | 11,703 |
| | — |
| | 12,164 |
| | 6 |
|
| Consumer non-real estate | 268 |
| | 268 |
| | 28 |
| | 485 |
| | 21 |
|
| Commercial/agricultural non-real estate | 5,401 |
| | 5,401 |
| | 49 |
| | 5,610 |
| | 8 |
|
| Total | $ | 24,266 |
| | $ | 24,266 |
| | $ | 300 |
| | $ | 24,313 |
| | $ | 343 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended | | |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized | | | | |
| March 31, 2022 | | | | | | | | | | | | | |
| With No Related Allowance Recorded: | | | | | | | | | | | | | |
| Commercial/Agricultural real estate | $ | 13,840 | | | $ | 14,116 | | | $ | — | | | $ | 16,626 | | | $ | 136 | | | | | |
| C&I/Agricultural operating | 6,015 | | | 6,167 | | | — | | | 5,319 | | | 50 | | | | | |
| Residential mortgage | 6,447 | | | 6,528 | | | — | | | 6,882 | | | 71 | | | | | |
| Consumer installment | 210 | | | 210 | | | — | | | 258 | | | 2 | | | | | |
| Total | $ | 26,512 | | | $ | 27,021 | | | $ | — | | | $ | 29,085 | | | $ | 259 | | | | | |
| With An Allowance Recorded: | | | | | | | | | | | | | |
| Commercial/Agricultural real estate | $ | 6,481 | | | $ | 6,481 | | | $ | 1,280 | | | $ | 5,285 | | | $ | 11 | | | | | |
| C&I/Agricultural operating | 438 | | | 438 | | | 373 | | | 415 | | | 10 | | | | | |
| Residential mortgage | 310 | | | 310 | | | 69 | | | 600 | | | 1 | | | | | |
| Consumer installment | — | | | — | | | — | | | 1 | | | — | | | | | |
| Total | $ | 7,229 | | | $ | 7,229 | | | $ | 1,722 | | | $ | 6,301 | | | $ | 22 | | | | | |
| March 31, 2022 | | | | | | | | | | | | | |
| Commercial/Agricultural real estate | $ | 20,321 | | | $ | 20,597 | | | $ | 1,280 | | | $ | 21,911 | | | $ | 147 | | | | | |
| C&I/Agricultural operating | 6,453 | | | 6,605 | | | 373 | | | 5,734 | | | 60 | | | | | |
| Residential mortgage | 6,757 | | | 6,838 | | | 69 | | | 7,482 | | | 72 | | | | | |
| Consumer installment | 210 | | | 210 | | | — | | | 259 | | | 2 | | | | | |
| Total | $ | 33,741 | | | $ | 34,250 | | | $ | 1,722 | | | $ | 35,386 | | | $ | 281 | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
| September 30, 2017 | | | | | | | | | |
| With No Related Allowance Recorded: | | | | | | | | | |
| Residential real estate | $ | 4,015 |
| | $ | 4,015 |
| | $ | — |
| | $ | 3,440 |
| | $ | 9 |
|
| Commercial/agriculture real estate | 12,626 |
| | 12,626 |
| | — |
| | 4,460 |
| | 2 |
|
| Consumer non-real estate | 433 |
| | 433 |
| | — |
| | 340 |
| | 16 |
|
| Commercial/agricultural non-real estate | 5,795 |
| | 5,795 |
| | — |
| | 2,628 |
| | 11 |
|
| Total | $ | 22,869 |
| | $ | 22,869 |
| | $ | — |
| | $ | 10,868 |
| | $ | 38 |
|
| With An Allowance Recorded: | | | | | | | | | |
| Residential real estate | $ | 1,198 |
| | $ | 1,198 |
| | $ | 214 |
| | $ | 1,545 |
| | $ | 2 |
|
| Commercial/agriculture real estate | — |
| | — |
| | — |
| | — |
| | — |
|
| Consumer non-real estate | 269 |
| | 269 |
| | 65 |
| | 306 |
| | — |
|
| Commercial/agricultural non-real estate | 23 |
| | 23 |
| | 23 |
| | 101 |
| | — |
|
| Total | $ | 1,490 |
| | $ | 1,490 |
| | $ | 302 |
| | $ | 1,952 |
| | $ | 2 |
|
| September 30, 2016 Totals: | | | | | | | | | |
| Residential real estate | $ | 5,213 |
| | $ | 5,213 |
| | $ | 214 |
| | $ | 4,985 |
| | $ | 11 |
|
| Commercial/agriculture real estate | 12,626 |
| | 12,626 |
| | — |
| | 4,460 |
| | 2 |
|
| Consumer non-real estate | 702 |
| | 702 |
| | 65 |
| | 646 |
| | 16 |
|
| Commercial/agricultural non-real estate | 5,818 |
| | 5,818 |
| | 23 |
| | 2,729 |
| | 11 |
|
| Total | $ | 24,359 |
| | $ | 24,359 |
| | $ | 302 |
| | $ | 12,820 |
| | $ | 40 |
|
| | | | | | | | | | | | | | |
| | Term Extension |
| Loan Class | | Amortized Cost Basis at
March 31, 2023 | | % of Total Class of Financing Receivables |
| Commercial real estate | | $ | 5,359 | | | 0.74 | % |
| Commercial and industrial | | $ | 25 | | | 0.02 | % |
| Residential mortgage | | $ | 38 | | | 0.03 | % |
| | | | |
| | Other-Than-Insignificant Payment Delay |
| Loan Class | | Amortized Cost Basis at
March 31, 2023 | | % of Total Class of Financing Receivables |
| Other consumer | | $ | 22 | | | 0.33 | % |
| | | | |
| | | | |
The following tables describe the financial effect of the modifications made to borrowers experiencing financial difficulty:
| | | | | | | | |
| Term Extension |
| Loan Class | | Financial Effect |
| Commercial real estate | | A weighted average of 6 months was added to the term of the loans |
| Commercial and industrial | | A weighted average of 5 months was added to the term of the loans |
| Residential mortgage | | A weighted average of 17 months was added to the term of the loans |
| | |
| Other-Than-Insignificant Payment Delay |
| Loan Class | | Financial Effect |
| Other consumer | | Payments were deferred a weighted average of 3 months |
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The Company closely monitors the performance of loans that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of such loans that have been modified during the three months ended March 31, 2023. No loan modified within the last three months has subsequently defaulted.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 89 Days Past Due | |
| Commercial real estate | | $ | 5,359 | | | $ | — | | | $ | — | | | $ | — | | |
| Commercial and industrial | | 25 | | | — | | | — | | | — | | |
| Residential mortgage | | 38 | | | — | | | — | | | — | | |
| Other consumer | | 22 | | | — | | | — | | | — | | |
| Total | | $ | 5,444 | | | $ | — | | | $ | — | | | $ | — | | |
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 include, but are not limited to, anmay include: extension of loan terms,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 5was one accruing, delinquent TDRsTDR loan greater than 60 days past due, with a recorded investment of $738$15 at December 31, 2017, compared to 3 such loans with a recorded investment of $504 at September 30, 2017.2022.
Following is a summary of TDR loans by accrual status as of December 31, 2017 and September 30, 2017.2022.
| | | | | | | | | | |
| | December 31, 2022 | | |
| Troubled debt restructure loans: | | | | |
| Accrual status | | $ | 5,171 | | | |
| Non-accrual status | | 2,617 | | | |
| Total | | $ | 7,788 | | | |
There was one TDR commitment totaling $26 meeting our TDR criteria as of December 31, 2022. There were no TDR commitments or unused lines of credit totaling $484 meeting our TDR criteria as of December 31, 2017.2022.
|
| | | | | | | | |
| | | December 31, 2017 | | September 30, 2017 |
| Troubled debt restructure loans: | | | | |
| Accrual status | | $ | 5,936 |
| | $ | 5,230 |
|
| Non-accrual status | | 1,327 |
| | 621 |
|
| Total | | $ | 7,263 |
| | $ | 5,851 |
|
The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the three months ended DecemberMarch 31, 2017 and the year ended September 30, 2017:2022:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of Contracts | | Modified Rate | | Modified Payment | | Modified Under- writing | | Other | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Specific Reserve |
| Three months ended December 31, 2017 | | | | | | | | | | | | | | | | |
| TDRs: | | | | | | | | | | | | | | | | |
| Residential real estate | | 1 |
| | $ | — |
| | $ | — |
| | $ | 22 |
| | $ | — |
| | $ | 22 |
| | $ | 22 |
| | $ | — |
|
| Commercial/Agricultural real estate | | 4 |
| | — |
| | 410 |
| | 259 |
| | 146 |
| | 815 |
| | 815 |
| | — |
|
| Consumer non-real estate | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial/Agricultural non-real estate | | 4 |
| | — |
| | 84 |
| | 471 |
| | 88 |
| | 643 |
| | 643 |
| | — |
|
| Totals | | 9 |
| | $ | — |
| | $ | 494 |
| | $ | 752 |
| | $ | 234 |
| | $ | 1,480 |
| | $ | 1,480 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 March 31, 2022 | | | | | | | | | | | | | | | | |
| TDRs: | | | | | | | | | | | | | | | | |
| Commercial/Agricultural real estate | | 4 | | | $ | 1,241 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,241 | | | $ | 1,241 | | | $ | — | |
| C&I/Agricultural operating | | 1 | | | — | | | — | | | 150 | | | — | | | 150 | | | 150 | | | — | |
| Residential mortgage | | 4 | | | 31 | | | — | | | 507 | | | — | | | 538 | | | 538 | | | — | |
| Consumer installment | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Totals | | 9 | | | $ | 1,272 | | | $ | — | | | $ | 657 | | | $ | — | | | $ | 1,929 | | | $ | 1,929 | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of Contracts | | Modified Rate | | Modified Payment | | Modified Under- writing | | Other | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Specific Reserve |
| Year ended September 30, 2017 | | | | | | | | | | | | | | | | |
| TDRs: | | | | | | | | | | | | | | | | |
| Residential real estate | | 9 |
| | $ | — |
| | $ | — |
| | $ | 679 |
| | $ | 236 |
| | $ | 915 |
| | $ | 915 |
| | $ | 24 |
|
| Commercial/Agricultural real estate | | 8 |
| | — |
| | — |
| | 1,822 |
| | 68 |
| | 1,890 |
| | 1,890 |
| | — |
|
| Consumer non-real estate | | 4 |
| | — |
| | — |
| | 4 |
| | 28 |
| | 32 |
| | 32 |
| | — |
|
| Commercial/Agricultural non-real estate | | 2 |
| | — |
| | — |
| | — |
| | 93 |
| | 93 |
| | 93 |
| | — |
|
| Totals | | 23 |
| | $ | — |
| | $ | — |
| | $ | 2,505 |
| | $ | 425 |
| | $ | 2,930 |
| | $ | 2,930 |
| | $ | 24 |
|
A summary ofThere were no loans by loan segment modified in a troubled debt restructuring as of December 31, 2017 and September 30, 2017, was as follows:
|
| | | | | | | | | | | | | |
| | December 31, 2017 | | September 30, 2017 |
| | Number of Modifications | | Recorded Investment | | Number of Modifications | | Recorded Investment |
| Troubled debt restructurings: | | | | | | | |
| Residential real estate | 33 |
| | $ | 3,667 |
| | 32 |
| | $ | 3,678 |
|
| Commercial/Agricultural real estate | 12 |
| | 2,699 |
| | 8 |
| | 1,890 |
|
| Consumer non-real estate | 19 |
| | 166 |
| | 20 |
| | 195 |
|
| Commercial/Agricultural non-real estate | 6 |
| | 731 |
| | 2 |
| | 88 |
|
| Total troubled debt restructurings | 70 |
| | $ | 7,263 |
| | 62 |
| | $ | 5,851 |
|
The following table provides information related to restructured loans that were considered in default as of December 31, 2017 and September 30, 2017:
|
| | | | | | | | | | | | | |
| | December 31, 2017 | | September 30, 2017 |
| | Number of Modifications | | Recorded Investment | | Number of Modifications | | Recorded Investment |
| Troubled debt restructurings: | | | | | | | |
| Residential real estate | 4 |
| | $ | 591 |
| | 4 |
| | $ | 593 |
|
| Commercial/Agricultural real estate | 2 |
| | 556 |
| | — |
| | — |
|
| Consumer non-real estate | 2 |
| | 9 |
| | 3 |
| | 28 |
|
| Commercial/Agricultural non-real estate | 2 |
| | 171 |
| | — |
| | — |
|
| Total troubled debt restructurings | 10 |
| | $ | 1,327 |
| | 7 |
| | $ | 621 |
|
Included above are five TDR loan that became in defaultduring the previous twelve months which subsequently defaulted during the three months ended DecemberMarch 31, 2017.2022.
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:
|
| | | |
| | December 31, 2017 |
| Accountable for under ASC 310-30 (Purchased Credit Impaired "PCI" loans) | |
| Outstanding balance | $ | 10,923 |
|
| Carrying amount | $ | 8,734 |
|
| Accountable for under ASC 310-20 (non-PCI loans) |
|
| Outstanding balance | $ | 239,964 |
|
| Carrying amount | $ | 237,213 |
|
| Total acquired loans | |
| Outstanding balance | $ | 250,887 |
|
| Carrying amount | $ | 245,947 |
|
The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-20:
|
| | | |
| | December 31, 2017 |
| Balance at beginning of period | $ | 2,893 |
|
| Acquisitions | — |
|
| Reduction due to unexpected early payoffs | — |
|
| Reclass from non-accretable difference | — |
|
| Disposals/transfers | — |
|
| Accretion | (142 | ) |
| Balance at end of period | $ | 2,751 |
|
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 March 31, 2023 and December 31, 20172022 were $513,781 and September 30, 2017 were $280,947 and $282,392,$523,736, 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.
Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits were $2,332$4,552 and $3,208,$2,649 at March 31, 2023 and December 31, 2017 and September 30, 2017,2022, respectively.
Mortgage servicing rights activity for the three month periods ended March 31, 2023 and March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | |
| | As of and for the Three Months Ended | | As of and for the Three Months Ended | | | | |
| | March 31, 2023 | | March 31, 2022 | | | | |
| Mortgage servicing rights: | | | | | | | | |
| Mortgage servicing rights, beginning of period | | $ | 4,262 | | | $ | 4,727 | | | | | |
| | | | | | | | |
| Increase in mortgage servicing rights resulting from transfers of financial assets | | 16 | | | 126 | | | | | |
| Amortization during the period | | (158) | | | (239) | | | | | |
| Mortgage servicing rights, end of period | | 4,120 | | | 4,614 | | | | | |
| Valuation allowance: | | | | | | | | |
| Valuation allowance, beginning of period | | — | | | (566) | | | | | |
| Additions | | — | | | — | | | | | |
| Recoveries | | — | | | 566 | | | | | |
| | | | | | | | |
| Valuation allowance, end of period | | — | | | — | | | | | |
| Mortgage servicing rights, net | | $ | 4,120 | | | $ | 4,614 | | | | | |
| Fair value of mortgage servicing rights; end of period | | $ | 5,482 | | | $ | 5,267 | | | | | |
| | | | | | | | |
| | | | | | | | |
The current period change in valuation allowance, if applicable, is included in non-interest expense as mortgage servicing rights expense, net on the consolidated statement of operations. Servicing fees totaled $317 and $351 for the three months ended March 31, 2023 and March 31, 2022, respectively. Servicing fees are included in loan servicing income on the consolidated statement of operations. Late fees and ancillary fees related to loan servicing are not material.
To estimate the fair value of the MSR asset, a valuation model is applied at the loan level to calculate the present value of the expected future cash flows. The valuation model incorporates various assumptions that would impact market participants’ estimations of future servicing income. Central to the valuation model is the discount rate. Fair value at both March 31, 2023 and March 31, 2022, was determined using discount rates ranging from 9% to 12%. Other assumptions utilized in the valuation model include, but are not limited to, prepayment speed, servicing costs, delinquencies, costs of advances, foreclosure costs, ancillary income, and income earned on float and escrow.
NOTE 5 – LEASES
We have operating leases for 1 corporate office, 4 bank branch offices, 1 former bank branch office, and 1 ATM location. Our leases have remaining lease terms ranging from approximately 0.58 to 5.25 years. Some of the leases include an option to extend, the longest of with is for two 5 year terms. As of March 31, 2023, we have no lease commitments that have not yet commenced. The Company also leases a portion of some of its facilities and receives rental income from such lease agreements, all of which are considered operating leases.
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2023 | | March 31, 2022 |
| The components of total lease cost were as follows: | | | | |
| Operating lease cost | | $ | 129 | | | $ | 139 | |
| Variable lease cost | | 13 | | | 10 | |
| Total lease cost | | $ | 142 | | | $ | 149 | |
| | | | |
| The components of total lease income were as follows: | | | | |
| Operating lease income | | $ | 9 | | | $ | 9 | |
| | | | |
| 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 | | $ | 138 | | | $ | 139 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | March 31, 2023 | | December 31, 2022 |
| Supplemental balance sheet information related to leases was as follows: | | | | |
| Operating lease right-of-use assets | | $ | 1,586 | | | $ | 1,700 | |
| Operating lease liabilities | | $ | 1,823 | | | $ | 1,945 | |
| | | | |
| Weighted average remaining lease term in years; operating leases | | 4.69 | | 4.89 |
| Weighted average discount rate; operating leases | | 3.00 | % | | 2.98 | % |
Cash obligations and receipts under lease contracts are as follows:
| | | | | | | | |
| Fiscal years ending December 31, | Payments | Receipts |
| 2023 | $ | 433 | | $ | 24 | |
| 2024 | 467 | | 17 | |
| 2025 | 452 | | 2 | |
| 2026 | 396 | | — | |
| 2027 | 401 | | — | |
| Thereafter | 141 | | — | |
| Total | 2,290 | | $ | 43 | |
| Less: effects of discounting | (467) | | |
| Lease liability recognized | $ | 1,823 | | |
NOTE 6 – DEPOSITS
The following is a summary of deposits by type at March 31, 2023 and December 31, 2022, respectively:
| | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | |
| Non-interest bearing demand deposits | | $ | 247,735 | | | $ | 284,722 | | | |
| Interest bearing demand deposits | | 390,730 | | | 371,210 | | | |
| Savings accounts | | 214,537 | | | 220,019 | | | |
| Money market accounts | | 309,005 | | | 323,435 | | | |
| Certificate accounts | | 274,786 | | | 225,334 | | | |
| Total deposits | | $ | 1,436,793 | | | $ | 1,424,720 | | | |
| | | | | | |
At March 31, 2023, the scheduled maturities of time deposits were as follows for the year ended, except December 31, 2023, which is the nine months ended:
| | | | | | | | |
| December 31, 2023 | | $ | 102,059 | |
| December 31, 2024 | | 145,407 | |
| December 31, 2025 | | 19,586 | |
| December 31, 2026 | | 1,546 | |
| December 31, 2027 | | 595 | |
| After December 31, 2027 | | 5,593 | |
| Total | | $ | 274,786 | |
Time deposits of $250 or more were $87,549 and $66,827 at March 31, 2023 and December 31, 2022, respectively.
Brokered deposits were $63,962 at March 31, 2023 and consisted of $53,962 of brokered certificates of deposit and $10,000 of brokered money market accounts. Brokered Deposits were $39,841 at December 31, 2022 and consisted of $39,839 of brokered certificates of deposit and $2 of brokered money market accounts.
At March 31, 2023, the scheduled maturities of brokered certificates of deposit were as follows for the year ended, except December 31, 2023, which is the nine months ended:
| | | | | | | | |
| December 31, 2023 | | $ | 39,839 | |
| | |
| December 31, 2025 (1) | | 8,634 | |
| | |
| | |
| December 31, 2028 (1) | | 5,489 | |
| Total | | $ | 53,962 | |
(1) The Company can call the brokered certificates of deposits maturing in the years ended December 31, 20172025 and year ended September 30, 2017 were as follows:2028, monthly beginning in March 2024.
|
| | | | | | | | |
| | | Three Months Ended | | Twelve Months Ended |
| | | December 31, 2017 | | September 30, 2017 |
| Balance at beginning of period | | $ | 1,886 |
| | $ | — |
|
| MSR asset acquired | | — |
| | 1,909 |
|
| MSRs capitalized | | 70 |
| | 13 |
|
| Amortization during the period | | (90 | ) | | (36 | ) |
| Valuation allowance at end of period | | — |
| | — |
|
| Net book value at end of period | | $ | 1,866 |
| | $ | 1,886 |
|
| Fair value of MSR asset at end of period | | $ | 2,020 |
| | $ | 1,951 |
|
| Residential mortgage loans serviced for others | | $ | 280,947 |
| | $ | 282,392 |
|
| Net book value of MSR asset to loans serviced for others | | 0.63 | % | | 0.67 | % |
NOTE 57 – FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES AND OTHER BORROWINGS
A summary of Federal Home Loan Bank advances and other borrowings at March 31, 2023 and December 31, 2017 and September 30, 20172022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Stated Maturity | | Amount | | Range of Stated Rates | | Stated Maturity | | Amount | | Range of Stated Rates |
| Federal Home Loan Bank advances (1), (2), (3) | | 2023 | | $ | 157,000 | | | 1.43 | % | | 4.92 | % | | 2023 | | $ | 117,000 | | | 1.43 | % | | 4.31 | % |
| | 2024 | | 20,530 | | | 0.00 | % | | 1.45 | % | | 2024 | | 20,530 | | | 0.00 | % | | 1.45 | % |
| | 2025 | | 5,000 | | | 1.45 | % | | 1.45 | % | | 2025 | | 5,000 | | | 1.45 | % | | 1.45 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Federal Home Loan Bank advances | | | | $ | 182,530 | | | | | | | | | $ | 142,530 | | | | | |
| | | | | | | | | | | | | | | | |
| Senior Notes (4) | | 2034 | | $ | 18,083 | | | 6.75 | % | | 7.25 | % | | 2034 | | $ | 23,250 | | | 3.00 | % | | 6.75 | % |
| | | | | | | | | | | | | | | | |
| Subordinated Notes (5) | | 2030 | | $ | 15,000 | | | 6.00 | % | | 6.00 | % | | 2030 | | $ | 15,000 | | | 6.00 | % | | 6.00 | % |
| | 2032 | | 35,000 | | | 4.75 | % | | 4.75 | % | | 2032 | | 35,000 | | | 4.75 | % | | 4.75 | % |
| | | | | | | | | | | | | | | | |
| | | | $ | 50,000 | | | | | | | | | $ | 50,000 | | | | | |
| | | | | | | | | | | | | | | | |
| Unamortized debt issuance costs | | | | (783) | | | | | | | | | (841) | | | | | |
| Total other borrowings | | | | $ | 67,300 | | | | | | | | | $ | 72,409 | | | | | |
| | | | | | | | | | | | | | | | |
| Totals | | | | $ | 249,830 | | | | | | | | | $ | 214,939 | | | | | |
(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 $1,017,535 and $984,878 at March 31, 2023 and December 31, 2022, respectively. At March 31, 2023, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $213,372 compared to $256,773 as of December 31, 2022.
(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $182,530 and $157,530, during the three months ended March 31, 2023 and the twelve months ended December 31, 2022, respectively.
(3) The weighted-average interest rate on FHLB borrowings maturing within twelve months as of March 31, 2023 and December 31, 2022 were 4.55% and 4.09%, respectively.
(4) Senior notes, entered into by the Company in June 2019 consist of the following:
(a) A term note, which was subsequently refinanced in March 2022 and modified in February of 2023, requiring quarterly interest-only payments through March 2027, and quarterly principal and interest payments thereafter. Interest is variable, based on US Prime rate minus 75 basis points with a floor rate of 3.00%.
(b) A $5,000 line of credit, maturing August 1, 2023, that remains undrawn upon.
(5) Subordinated notes resulted from the following:
(a) 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. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.
|
| | | | | | | |
| | December 31, 2017 | | September 30, 2017 |
| Advances from FHLB: | | | |
| Fixed rates | $ | 94,000 |
| | $ | 90,000 |
|
| | | | |
| Senior notes: | | | |
| Variable rate due in May 2021 | 10,389 |
| | 10,694 |
|
| Variable rate due in August 2022 | 4,875 |
| | 5,000 |
|
| | 15,264 |
| | 15,694 |
|
| Subordinated notes: | | | |
| 6.75% due August 2027, variable rate commencing August 2022 | 5,000 |
| | 5,000 |
|
| 6.75% due August 2027, variable rate commencing August 2022 | 10,000 |
| | 10,000 |
|
| | 15,000 |
| | 15,000 |
|
| Less: unamortized debt issuance costs | (365 | ) | | (375 | ) |
| Total other borrowings | 29,899 |
| | 30,319 |
|
| | | | |
| TOTALS | $ | 123,899 |
| | $ | 120,319 |
|
Federal Home Loan Bank Advances and Irrevocable Standby Letters of Credit
The Bank had one long-term fixed rate advance from the FHLB with a contractual interest rate of 0.99% at December 31, 2017. Advances from the FHLB have terms of 24 months or less, mature at various dates through 2018, and are secured by $316,155 of real estate and commercial and industrial loans. Each Federal Home Loan Bank advance is payable at the maturity date, with a prepayment penalty for fixed rate advances.
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"(“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 $36,905$206,150 and $30,233$191,650 at December 31, 2017 and September 30, 2017, respectively.
At December 31, 2017, the Bank’s available and unused portion of this borrowing arrangement was approximately $185,236, compared to $92,959 as of September 30, 2017.
Maximum month-end amounts outstanding under this borrowing agreement were $94,000 and $90,000 during the three months ended December 31, 2017 and year ended September 30, 2017, respectively.
Senior Notes and Revolving Line of Credit
On May 16, 2016, the Company entered into a Loan Agreement evidencing an $11,000 term loan maturing on May 15, 2021. The proceeds from the Loan were used by the Company for the sole purpose of financing the acquisition, by merger, of Community Bank of Northern Wisconsin.
On May 30, 2017, the Company extended a $5,000 term loan facility for the sole purpose of financing the acquisition, by merger, of Wells Financial Corporation. On August 17, 2017, this term loan was funded and matures on August 15, 2022 with a ten year amortization.
The variable rate senior notes provide for a floating interest rate that resets quarterly at rates that are indexed to the three-month London interbank offered rate ("LIBOR") plus 2.70%. The contractual interest rates for those notes ranged from 4.01% to 4.07% during the three months ended December 31, 2017, and from 3.44% to 4.01% during the year ended September 30, 2017. The weighted average contractual interest rates payable were 4.07% and 4.01% at December 31, 2017 and September 30, 2017, respectively.
Subordinated Notes
On August 10, 2017, the Company entered into two subordinated note agreements in the amounts of $5,000 and $10,000, both maturing on August 9, 2027. The proceeds of the loans were used by the Company for the sole purpose of financing the acquisition, by merger, of Wells Financial Corporation.
The subordinated notes are unsecured and are subordinate to the claims of other creditors of the Company. The subordinated notes mature in August 2027, and convert to variable interest rate notes in August 2022. These notes provide for an annual fixed interest rate for the first five years of 6.75%. After the fixed interest period and through maturity, the interest rate will be reset quarterly to equal the three-month LIBOR rate, plus 4.90%. Interest on the Notes will be payable quarterly in arrears on March 31, June 30, September 302023 and December 31, of each year through the maturity date.2022, respectively.
Federal Reserve Borrowings
Debt Issuance Costs
Debt issuance costs, consisting primarily of investment bankingAt March 31, 2023 and loan origination fees, of $380 were incurred in conjunction with the senior and the issuance of subordinated notes for the year ended September 30, 2017. The unamortized amount of debt issuance costs at December 31, 20172022, the Bank had the ability to borrow $19,869 and September 30, 2017$4,118 from the Federal Reserve Bank of Minneapolis. The ability to borrow is based on mortgage-backed securities pledged with a carrying value of $30,396 and $5,421 as of March 31, 2023 and December 31, 2022, respectively. There were no Federal Reserve borrowings outstanding as of March 31, 2023 and December 31, 2022.
In March of 2023, the Bank was $365approved to obtain funding from the Federal Reserve’s new Bank Term Funding Program (“BTFP”). As of March 31, 2023, the Bank has not borrowed from this facility and $375.has not pledged any collateral to this facility.
Federal Funds Purchased Lines of Credit
As of March 31, 2023, the Bank maintains two unsecured federal funds purchased lines of credit with its banking partners which total $30,000. As of December 31, 2022, the Bank maintained three unsecured federal funds purchased lines of credit with its banking partners which totaled $75,000. These debt issuance costslines bear interest at the lender bank’s announced daily federal funds rate, mature daily and are included in otherrevocable at the discretion of the lending institution. There were no borrowings outstanding on the consolidated balance sheet.these lines of credit as of March 31, 2023 or December 31, 2022.
Maturities of FHLB advances and other borrowings are as follows:
|
| | | |
| Fiscal years ending September 30, | |
| 2018 | $ | 94,000 |
|
| 2019 | — |
|
| 2020 | — |
|
| 2021 | 10,389 |
|
| 2022 | 4,841 |
|
| Thereafter | 14,669 |
|
| | $ | 123,899 |
|
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 March 31, 2023, the Bank was categorized as “Well Capitalized”, under Prompt Corrective Action Provisions.
The Bank’s Tier 1 (leverage) and risk-based capital ratios at March 31, 2023, and December 31, 2022, 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 March 31, 2023 | | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | | $ | 226,873 | | | 14.6 | % | | $ | 124,595 | | | > = | | 8.0 | % | | $ | 155,744 | | | > = | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | | 207,474 | | | 13.3 | % | | $ | 93,446 | | | > = | | 6.0 | % | | 124,595 | | | > = | | 8.0 | % |
| Common equity tier 1 capital (to risk weighted assets) | | 207,474 | | | 13.3 | % | | $ | 70,085 | | | > = | | 4.5 | % | | 101,234 | | | > = | | 6.5 | % |
| Tier 1 leverage ratio (to adjusted total assets) | | 207,474 | | | 11.7 | % | | 71,180 | | | > = | | 4.0 | % | | 88,974 | | | > = | | 5.0 | % |
| As of December 31, 2022 | | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | | $ | 221,361 | | | 14.2 | % | | $ | 124,971 | | | > = | | 8.0 | % | | $ | 156,213 | | | > = | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | | 203,422 | | | 13.0 | % | | 93,728 | | | > = | | 6.0 | % | | 124,971 | | | > = | | 8.0 | % |
| Common equity tier 1 capital (to risk weighted assets) | | 203,422 | | | 13.0 | % | | 70,296 | | | > = | | 4.5 | % | | 101,539 | | | > = | | 6.5 | % |
| Tier 1 leverage ratio (to adjusted total assets) | | 203,422 | | | 11.5 | % | | 70,610 | | | > = | | 4.0 | % | | 88,262 | | | > = | | 5.0 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The Company’s Tier 1 (leverage) and risk-based capital ratios at March 31, 2023 and December 31, 2022, respectively, are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Actual | | For Capital Adequacy
Purposes | | |
| | | Amount | | Ratio | | Amount | | | | Ratio | | | | | | |
| As of March 31, 2023 | | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | | $ | 220,131 | | | 14.1 | % | | 124,595 | | | > = | | 8.0 | % | | | | | | |
| Tier 1 capital (to risk weighted assets) | | 150,732 | | | 9.7 | % | | 93,446 | | | > = | | 6.0 | % | | | | | | |
| Common equity tier 1 capital (to risk weighted assets) | | 150,732 | | | 9.7 | % | | 70,085 | | | > = | | 4.5 | % | | | | | | |
| Tier 1 leverage ratio (to adjusted total assets) | | 150,732 | | | 8.5 | % | | 71,180 | | | > = | | 4.0 | % | | | | | | |
| As of December 31, 2022 | | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | | $ | 218,737 | | | 14.0 | % | | $ | 124,971 | | | > = | | 8.0 | % | | | | | | |
| Tier 1 capital (to risk weighted assets) | | 150,798 | | | 9.7 | % | | 93,728 | | | > = | | 6.0 | % | | | | | | |
| Common equity tier 1 capital (to risk weighted assets) | | 150,798 | | | 9.7 | % | | 70,296 | | | > = | | 4.5 | % | | | | | | |
| Tier 1 leverage ratio (to adjusted total assets) | | 150,798 | | | 8.5 | % | | 70,610 | | | > = | | 4.0 | % | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
NOTE 69 – STOCK-BASED COMPENSATION
In February 2005,On March 27, 2018, the Company’s stockholders of Citizens Community Bancorp, Inc. approved the Company’s 2004 Recognition and Retention2018 Equity Incentive Plan. This plan provides for the grantThe aggregate number of up to 113,910 shares of the Company’s common stock to eligible participantsinitially reserved and available for issuance under the 2018 Equity Incentive Plan was 350,000 shares. As of March 31, 2023, 290,187 restricted shares had been granted under this plan. This amount includes 11,834 shares of performance based restricted stock granted in 2019 and issued in January 2022 upon achievement of the performance criteria and completion of the three year performance period beginning in January 2019 and ending December 31, 2021. The amount also includes 18,551 shares of performance based restricted stock granted in 2020 and issued in January 2023 upon achievement of the performance criteria and completion of the three year performance period beginning in January 2020 and ending December 31, 2022. In addition, it includes 1,119 shares of performance based restricted stock granted in 2020 and 638 shares of performance based restricted stock granted in 2021 issued in August of 2022. Both of these issuances were approved by the Compensation Committee in accordance with plan documents and were to a former employee. As of DecemberMarch 31, 2017, 113,910 restricted shares under this plan were granted. In February 2005, the Company’s stockholders also approved the Company’s 2004 Stock Option and Incentive Plan. This plan provides for the grant of nonqualified and incentive2023, no stock options and stock appreciation rights to eligible participants under the plan. The plan provides for the grant of awards for up to 284,778 shares of the Company’s common stock. At December 31, 2017, 284,778 options had been granted under this plan to eligible participants.plan.
In February 2008, the Company’s stockholders approved the Company’s 2008 Equity Incentive Plan. The aggregate numberPlan for a term of shares of common stock reserved and available for issuance under10 years. Due to the 2008 Equity Incentive Plan is 597,605 shares. Under this Plan, the Compensation Committee may grant stock options and stock appreciation rights that, upon exercise, result in the issuance of 426,860 shares of the Company’s common stock. The Committee may also grant shares of restricted stock and restricted stock units for an aggregate of 170,745 shares of Company common stockplan’s expiration, no new awards can be granted under this plan. As of DecemberMarch 31, 2017, 73,6602023, there are no awarded unvested restricted shares under this plan were granted. As of December 31, 2017, 181,000and 57,000 awarded unexercised options had been granted to eligible participants.
Restricted shares granted to date under these plans were awarded at no cost to the employee and vest pro rata over a two to five-year periodremaining from the grant date, as determined by the Board of Directors at issuance.plan. Options granted to date under these plansthis plan vest pro rata over a five-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.
CompensationNet compensation expense related to restricted stock awards from both the 2004 Recognition and Retention Plan and the 2008 Equity Incentive Planthese plans was $16 and $16$216 for the three months ended DecemberMarch 31, 2017, and December2023, compared to $195 for the three months ended March 31, 2016, respectively.2022.
33Restricted Common Stock Award
| Restricted Common Stock Award | |
| | | | December 31, 2017 | | September 30, 2017 | | March 31, 2023 | | December 31, 2022 |
| | | Number of Shares | | Weighted
Average
Grant Price | | Number of Shares | | Weighted
Average
Grant Price | | Number of Shares | | Weighted
Average
Grant Price | | Number of Shares | | Weighted
Average
Grant Price |
| Restricted Shares | | | | | | | | | Restricted Shares | | | | | | | | |
| Unvested and outstanding at beginning of fiscal year | | 42,378 |
| | $ | 12.07 |
| | 23,159 |
| | $ | 9.59 |
| |
| Unvested and outstanding at beginning of year | | Unvested and outstanding at beginning of year | | 75,626 | | | $ | 12.30 | | | 75,630 | | | $ | 11.20 | |
| Granted | | 4,000 |
| | 13.60 |
| | 25,569 |
| | 13.53 |
| Granted | | 50,606 | | | 12.36 | | | 43,465 | | | 13.99 | |
| Vested | | — |
| | — |
| | (6,350 | ) | | 8.88 |
| Vested | | (28,690) | | | 12.07 | | | (40,843) | | | 12.12 | |
| Forfeited | | (10,410 | ) | | 9.97 |
| | — |
| | — |
| Forfeited | | (1,168) | | | 10.78 | | | (2,626) | | | 11.04 | |
| Unvested and outstanding fiscal to date | | 35,968 |
| | $ | 12.86 |
| | 42,378 |
| | $ | 12.07 |
| |
| Unvested and outstanding at end of period | | Unvested and outstanding at end of period | | 96,374 | | | $ | 12.42 | | | 75,626 | | | $ | 12.30 | |
The Company accounts for stock-basedstock option-based employee compensation related to the Company’s 2004 Stock Option and Incentive Plan and the 2008 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-basedstock option-based employee compensation related to boththe 2008 plan for the three month period ended March 31, 2023 was $0 as all options have vested. The compensation cost recognized for stock option-based employee compensation related to these plans for the three month periodsperiod ended DecemberMarch 31, 2017 and December 31, 2016,2022 was $6 and $8, respectively.$1.
Common Stock Option Awards
|
| | | | | | | | | | | | | |
| | | Option Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| 2018 | | | | | | | | |
| Outstanding at September 30, 2017 | | 146,606 |
| | $ | 9.45 |
| | | |
|
| Granted | | 8,000 |
| | 13.60 |
| | | | |
| Exercised | | (1,250 | ) | | 7.04 |
| | | | |
| Forfeited or expired | | (26,894 | ) | | — |
| | | | |
| Outstanding at December 31, 2017 | | 126,462 |
| | $ | 9.77 |
| | 6.47 | |
|
|
| Exercisable at December 31, 2017 | | 56,462 |
| | $ | 7.71 |
| | 3.67 | | $ | 327 |
|
| Fully vested and expected to vest | | 126,462 |
| | $ | 9.77 |
| | 6.47 | | $ | 596 |
|
| 2017 | | | | | | | | |
| Outstanding at September 30, 2016 | | 140,706 |
| | $ | 8.67 |
| | | | |
| Granted | | 23,000 |
| | 13.75 |
| | | | |
| Exercised | | (14,100 | ) | | 8.27 |
| | | | |
| Forfeited or expired | | (3,000 | ) | | 11.00 |
| | | | |
| Outstanding at September 30, 2017 | | 146,606 |
| | $ | 9.45 |
| | 6.68 | |
|
|
| Exercisable at September 30, 2017 | | 57,712 |
| | $ | 7.70 |
| | 3.89 | | $ | 361 |
|
| Fully vested and expected to vest | | 146,606 |
| | $ | 9.45 |
| | 6.68 | | $ | 659 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Shares | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term in Years | | Aggregate
Intrinsic
Value |
| March 31, 2023 | | | | | | | | |
| Outstanding at beginning of year | | 58,000 | | | $ | 11.51 | | | | | |
| | | | | | | | |
| Exercised | | — | | | — | | | | | |
| Forfeited or expired | | (1,000) | | | 13.76 | | | | | |
| Outstanding at end of period | | 57,000 | | | $ | 11.47 | | | 3.55 | | $ | 21 | |
| Exercisable at end of period | | 57,000 | | | $ | 11.47 | | | 3.55 | | $ | 21 | |
| | | | | | | | |
| December 31, 2022 | | | | | | | | |
| Outstanding at beginning of year | | 65,900 | | | $ | 11.20 | | | | | |
| | | | | | | | |
| Exercised | | (7,900) | | | 8.95 | | | | | |
| Forfeited or expired | | — | | | — | | | | | |
| Outstanding at end of year | | 58,000 | | | $ | 11.51 | | | 3.73 | | $ | 65 | |
| Exercisable at end of year | | 58,000 | | | $ | 11.51 | | | 3.73 | | $ | 65 | |
| | | | | | | | |
Information related to the 2004 Stock Option and Incentive Plan and 2008 Equity Incentive Plan during each yearfor the respective periods follows:
| | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2023 | | Twelve months ended December 31, 2022 | | |
| Intrinsic value of options exercised | | $ | — | | | $ | 38 | | | |
| Cash received from options exercised | | $ | — | | | $ | 71 | | | |
| Tax benefit realized from options exercised | | $ | — | | | $ | — | | | |
|
| | | | | | | | |
| | | 2018 | | 2017 |
| Intrinsic value of options exercised | | $ | 9 |
| | $ | 69 |
|
| Cash received from options exercised | | $ | 9 |
| | $ | 114 |
|
| Tax benefit realized from options exercised | | $ | — |
| | $ | — |
|
Set forth below is a table showing relevant assumptions used in calculating stock option expense related to the Company’s 2004 Stock Option and Incentive Plan and 2008 Equity Incentive Plan:
|
| | | | | | |
| | | 2018 | | 2017 |
| Dividend yield | | 1.18 | % | | 1.16 | % |
| Risk-free interest rate | | 2.4 | % | | 2.2 | % |
| Weighted average expected life (years) | | 10 |
| | 10 |
|
| Expected volatility | | 2.3 | % | | 2.4 | % |
NOTE 710 – 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 statementtopic 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, the Company utilizeswe utilize independent third party valuation analysis to support the Company’sour own estimates and judgments in determining fair value (Level 3 inputs).
Assets Measured on a Recurring Basis
The following tables present the financial instruments measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2017 and September 30, 2017:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair
Value | | Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| March 31, 2023 | | | | | | | |
| Investment securities: | | | | | | | |
| U.S. government agency obligations | $ | 25,182 | | | $ | — | | | $ | 25,182 | | | $ | — | |
| | | | | | | |
| Mortgage-backed securities | 78,959 | | | — | | | 78,959 | | | — | |
| | | | | | | |
| Corporate debt securities | 42,215 | | | — | | | 42,215 | | | — | |
| Corporate asset-backed securities | 27,067 | | | — | | | 27,067 | | | — | |
| | | | | | | |
| Total investment securities | 173,423 | | | — | | | 173,423 | | | — | |
| Equity Investments: | | | | | | | |
| Equity Investments | 380 | | | 380 | | | — | | | — | |
| Equity investments measured at NAV(1) | 1,771 | | | — | | | — | | | — | |
| Total equity investments | 2,151 | | | 380 | | | — | | | — | |
| Total | $ | 175,574 | | | $ | 380 | | | $ | 173,423 | | | $ | — | |
| | | | | | | |
| December 31, 2022 | | | | | | | |
| Investment securities: | | | | | | | |
| U.S. government agency obligations | $ | 18,313 | | | $ | — | | | $ | 18,313 | | | $ | — | |
| | | | | | | |
| Mortgage-backed securities | 78,610 | | | — | | | 78,610 | | | — | |
| | | | | | | |
| Corporate debt securities | 40,251 | | | — | | | 40,251 | | | — | |
| Corporate asset backed securities | 28,817 | | | — | | | 28,817 | | | — | |
| | | | | | | |
| Total investment securities | 165,991 | | | — | | | 165,991 | | | — | |
| Equity Investments: | | | | | | | |
| Equity Investments | 338 | | | 338 | | | — | | | — | |
| Equity investments measured at NAV(1) | 1,456 | | | — | | | — | | | — | |
| Total equity investments | 1,794 | | | 338 | | | — | | | — | |
| Total | $ | 167,785 | | | $ | 338 | | | $ | 165,991 | | | $ | — | |
| | | | | | | |
(1) Investments valued at NAV are excluded from being reported under the fair value hierarchy but are presented to permit reconciliation with the balance sheet in accordance with ASC 820-10-35-54B.
|
| | | | | | | | | | | | | | | |
| | Fair Value | | Quoted Prices in Active Markets for Identical Instruments (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| December 31, 2017 | | | | | | | |
| Investment securities: | | | | | | | |
| U.S. government agency obligations | $ | 17,591 |
| | $ | — |
| | $ | 17,591 |
| | $ | — |
|
| Obligations of states and political subdivisions | 35,414 |
| | — |
| | 35,414 |
| | — |
|
| Mortgage-backed securities | 38,020 |
| | — |
| | 38,020 |
| | — |
|
| Agency Securities | 234 |
| | — |
| | 234 |
| | — |
|
| Corporate debt securities | 5,289 |
| | — |
| | 5,289 |
| | — |
|
| Total | $ | 96,548 |
| | $ | — |
| | $ | 96,548 |
| | $ | — |
|
| September 30, 2017 | | | | | | | |
| Investment securities: | | | | | | | |
| U.S. government agency obligations | $ | 18,041 |
| | $ | — |
| | $ | 18,041 |
| | $ | — |
|
| Obligations of states and political subdivisions | 35,795 |
| | — |
| | 35,795 |
| | — |
|
| Mortgage-backed securities | 36,474 |
| | — |
| | 36,474 |
| | — |
|
| Agency securities | 230 |
| | — |
| | 230 |
| | — |
|
| Corporate debt securities | 5,343 |
| | | | 5,343 |
| | |
| Total | $ | 95,883 |
| | $ | — |
| | $ | 95,883 |
| | $ | — |
|
Assets Measured on Nonrecurring Basis
The following tables present the financial instruments measured at fair value on a nonrecurring basis as of March 31, 2023 and December 31, 2017 and September 30, 2017:2022:
| | | | | | | | | | | | Carrying Value | | Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| | Fair Value | | Quoted Prices in Active Markets for Identical Instruments (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
| December 31, 2017 | | | | | | | | |
| March 31, 2023 | | March 31, 2023 | | | | | | | |
| Foreclosed and repossessed assets, net | | Foreclosed and repossessed assets, net | $ | 1,113 | | | $ | — | | | $ | — | | | $ | 1,113 | |
| Collateral dependent loans with allowances | | Collateral dependent loans with allowances | 6,779 | | | — | | | — | | | 6,779 | |
| Mortgage servicing rights | | Mortgage servicing rights | 4,120 | | | — | | | — | | | 5,482 | |
| Total | | Total | $ | 12,012 | | | $ | — | | | $ | — | | | $ | 13,374 | |
| December 31, 2022 | | December 31, 2022 | | | | | | | |
| Foreclosed and repossessed assets, net | $ | 7,031 |
| | $ | — |
| | $ | — |
| | $ | 7,031 |
| Foreclosed and repossessed assets, net | $ | 1,271 | | | $ | — | | | $ | — | | | $ | 1,271 | |
| Impaired loans with allocated allowances | 1,793 |
| | — |
| | — |
| | 1,793 |
| Impaired loans with allocated allowances | 6,920 | | | — | | | — | | | 6,920 | |
| Mortgage servicing rights | 2,020 |
| | — |
| | — |
| | 2,020 |
| Mortgage servicing rights | 4,262 | | | — | | | — | | | 5,665 | |
| Total | $ | 10,844 |
| | $ | — |
| | $ | — |
| | $ | 10,844 |
| Total | $ | 12,453 | | | $ | — | | | $ | — | | | $ | 13,856 | |
| September 30, 2017 | | | | | | | | |
| Foreclosed and repossessed assets, net | $ | 6,017 |
| | $ | — |
| | $ | — |
| | $ | 6,017 |
| |
| Impaired loans with allocated allowances | 1,490 |
| | — |
| | — |
| | 1,490 |
| |
| Mortgage servicing rights | 1,951 |
| | — |
| | — |
| | 1,951 |
| |
| Total | $ | 9,458 |
| | $ | — |
| | $ | — |
| | $ | 9,458 |
| |
|
The fair value of collateral dependent loans with allowances, and impaired loans prior to the adoption of ASU 2016-13 on January 1, 2023, 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
DecemberMarch 31, 2017.2023.
|
| | | | | | | | | |
| | Fair Value | | Valuation Techniques (1) | | Significant Unobservable Inputs (2) | | Range |
| December 31, 2017 | | | | | | | |
| Foreclosed and repossessed assets, net | $ | 7,031 |
| | Appraisal value | | Estimated costs to sell | | 10 - 15% |
| Impaired loans with allocated allowances | $ | 1,793 |
| | Appraisal value | | Estimated costs to sell | | 10 - 15% |
| Mortgage servicing rights | $ | 2,020 |
| | Discounted cash flows | | Discounted rates | | 9.5% - 12.5% |
| September 30, 2017 | | | | | | | |
| Foreclosed and repossessed assets, net | $ | 6,017 |
| | Appraisal value | | Estimated costs to sell | | 10 - 15% |
| Impaired loans with allocated allowances | $ | 1,490 |
| | Appraisal value | | Estimated costs to sell | | 10 - 15% |
| Mortgage servicing rights | $ | 1,951 |
| | Discounted cash flows | | Discounted rates | | 9.5% - 12.5% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair
Value | | Valuation Techniques (1) | | Significant Unobservable Inputs (2) | | Range |
| March 31, 2023 | | | | | | | |
| Foreclosed and repossessed assets, net | $ | 1,113 | | | Appraisal value | | Estimated costs to sell | | 10% - 15% |
| Collateral dependent loans with allowances | $ | 6,779 | | | Appraisal value | | Estimated costs to sell | | 10% - 15% |
| Mortgage servicing rights | $ | 5,482 | | | Discounted cash flows | | Discounted rates | | 9% - 12% |
| December 31, 2022 | | | | | | | |
| Foreclosed and repossessed assets, net | $ | 1,271 | | | Appraisal value | | Estimated costs to sell | | 10% - 15% |
| Impaired loans with allocated allowances | $ | 6,920 | | | Appraisal value | | Estimated costs to sell | | 10% - 15% |
| Mortgage servicing rights | $ | 5,665 | | | 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 collateral depended loans, impaired loans prior to the adoption of ASU 2016-12, 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.
Fair Values of Financial Instruments
ASC 825-10 and ASC 270-10, Interim Disclosures about Fair Value Financial Instruments, require disclosures about fair value financial instruments and significant assumptions used to estimate fair value. The estimated fair values of financial instruments not previously disclosed are determined as follows:
Cash and Cash Equivalents
Due to their short-term nature, the carrying amounts of cash and cash equivalents are considered to be a reasonable estimate of fair value and represents a level 1 measurement.
Other Interest-Bearing Deposits
Fair value of interest bearing deposits is estimated using a discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and represents a level 3 measurement.
Non-marketable Equity Securities, at cost
Non-marketable equity securities are comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock carried at cost, which are their redeemable fair values since the market for each category of this stock is restricted and represents a level 1 measurement.
Loans Receivable, net
Fair value is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate, C&I and consumer. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity date using market discount rates reflecting the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank’s repayment schedules for each loan classification. The fair value of variable rate loans approximates carrying value. The net carrying value of the loans acquired through the CBN acquisition approximates the fair value of the loans at December 31, 2017. The fair value of loans is considered to be a level 3 measurement.
Loans Held for Sale
Fair values are based on quoted market prices of similar loans sold on the secondary market.
Mortgage Servicing Rights
Fair values are estimated using discounted cash flows based on current market rates and conditions.
Impaired Loans (carried at fair value)
Impaired loans are loans in which the Company has measured impairment, generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Foreclosed Assets (carried at fair value)
Foreclosed assets are the only non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less cost to sell. At foreclosure or repossession, if the fair value, less estimated costs to sell, of the collateral acquired (real estate, vehicles, equipment) is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held-for-sale is estimated using Level 3 inputs based on observable market data.
Accrued Interest Receivable and Payable
Due to their short-term nature, the carrying amounts of accrued interest receivable and payable are considered to be a reasonable estimate of fair value and represents a level 1 measurement.
Deposits
The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market accounts, is the amount payable on demand at the reporting date and represents a level 1 measurement. The fair value of fixed rate certificate accounts is calculated by using discounted cash flows applying interest rates currently being offered on similar certificates and represents a level 3 measurement. The net carrying value of fixed rate certificate accounts acquired through the CBN acquisition approximates the fair value of the certificates at December 31, 2017 and represents a level 3 measurement.
Federal Home Loan Bank ("FHLB") Advances
The fair value of long-term borrowed funds is estimated using discounted cash flows based on the Bank’s current incremental borrowing rates for similar borrowing arrangements. The carrying value of short-term borrowed funds approximates their fair value and represents a level 2 measurement.
Off-Balance Sheet Instruments
The fair value of off-balance sheet commitments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the customers. Since this amount is immaterial to the Company’s consolidated financial statements, no amount for fair value is presented. 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'sCompany’s financial instruments as of the dates indicated below were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2023 | | December 31, 2022 |
| | Valuation Method Used | | Carrying
Amount | | Estimated
Fair
Value | | Carrying
Amount | | Estimated
Fair
Value |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | (Level I) | | $ | 65,050 | | | $ | 65,050 | | | $ | 35,363 | | | $ | 35,363 | |
| Other interest-bearing deposits | (Level II) | | 249 | | | 249 | | | 249 | | | 250 | |
| Securities available for sale “AFS” | (Level II) | | 173,423 | | | 173,423 | | | 165,991 | | | 165,991 | |
| Securities held to maturity “HTM” | (Level II) | | 95,301 | | | 77,183 | | | 96,379 | | | 76,779 | |
| Equity investments | (Level I) | | 380 | | | 380 | | | 338 | | | 338 | |
| Equity investments valued at NAV(1) | N/A | | 1,771 | | | 1,771 | | | 1,456 | | | 1,456 | |
| Other investments | (Level II) | | 17,428 | | | 17,428 | | | 15,834 | | | 15,834 | |
| Loans receivable, net | (Level III) | | 1,398,276 | | | 1,348,570 | | | 1,393,845 | | | 1,342,838 | |
| Loans held for sale - Residential mortgage | (Level I) | | 393 | | | 402 | | | — | | | — | |
| Loans held for sale - SBA | (Level II) | | 368 | | | 408 | | | — | | | — | |
| Mortgage servicing rights | (Level III) | | 4,120 | | | 5,482 | | | 4,262 | | | 5,665 | |
| Accrued interest receivable | (Level I) | | 5,550 | | | 5,550 | | | 5,285 | | | 5,285 | |
| Financial liabilities: | | | | | | | | | |
| Deposits | (Level III) | | $ | 1,436,793 | | | $ | 1,434,459 | | | $ | 1,424,720 | | | $ | 1,420,871 | |
| FHLB advances | (Level II) | | 182,530 | | | 181,379 | | | 142,530 | | | 141,060 | |
| Other borrowings | (Level I) | | 67,300 | | | 67,300 | | | 72,409 | | | 72,409 | |
| Accrued interest payable | (Level I) | | 573 | | | 573 | | | 968 | | | 968 | |
(1) Investments valued at NAV are excluded from being reported under the fair value hierarchy but are presented to permit reconciliation with the balance sheet in accordance with ASC 820-10-35-54B.
NOTE 11—EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares outstanding for the period. A reconciliation of the basic and diluted earnings per share is as follows:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| (Share count in thousands) | | March 31, 2023 | | March 31, 2022 | | | | |
| | | | | | | | |
| Basic | | | | | | | | |
| Net income attributable to common stockholders | | $ | 3,662 | | | $ | 4,706 | | | | | |
| Weighted average common shares outstanding | | 10,472 | | | 10,527 | | | | | |
| Basic earnings per share | | $ | 0.35 | | | $ | 0.45 | | | | | |
| Diluted | | | | | | | | |
| Net income attributable to common stockholders | | $ | 3,662 | | | $ | 4,706 | | | | | |
| Weighted average common shares outstanding | | 10,472 | | | 10,527 | | | | | |
| | | | | | | | |
| Add: Dilutive stock options outstanding | | 6 | | | 14 | | | | | |
| Average shares and dilutive potential common shares | | 10,478 | | | 10,541 | | | | | |
| Diluted earnings per share | | $ | 0.35 | | | $ | 0.45 | | | | | |
| Additional common stock option shares that have not been included due to their antidilutive effect | | 20 | | | — | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | September 30, 2017 |
| | Valuation Method Used | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| Financial assets: | | | | | | | | |
| Cash and cash equivalents | (Level 1) | $ | 47,215 |
| | $ | 47,215 |
| | $ | 41,677 |
| | $ | 41,677 |
|
| Other interest-bearing deposits | (Level 1) | 7,155 |
| | 7,144 |
| | 8,148 |
| | 8,143 |
|
| Securities available for sale "AFS" | See above | 96,548 |
| | 96,548 |
| | 95,883 |
| | 95,883 |
|
| Securities held to maturity "HTM" | (Level II) | 5,227 |
| | 5,321 |
| | 5,453 |
| | 5,605 |
|
| Non-marketable equity securities, at cost | (Level II) | 8,151 |
| | 8,151 |
| | 7,292 |
| | 7,292 |
|
| Loans receivable, net | (Level III) | 725,059 |
| | 733,582 |
| | 727,053 |
| | 737,119 |
|
| Loans held for sale | (Level II) | 2,179 |
| | 2,179 |
| | 2,334 |
| | 2,334 |
|
| Mortgage servicing rights | (Level III) | 1,866 |
| | 2,020 |
| | 1,886 |
| | 1,951 |
|
| Accrued interest receivable | (Level 1) | 3,189 |
| | 3,189 |
| | 3,291 |
| | 3,291 |
|
| Financial liabilities: | | | | | | | | |
| Deposits | (Level III) | $ | 741,069 |
| | $ | 744,900 |
| | $ | 742,504 |
| | $ | 746,025 |
|
| FHLB advances | (Level III) | 94,000 |
| | 93,926 |
| | 90,000 |
| | 89,998 |
|
| Other borrowings | (Level 1) | 29,899 |
| | 29,899 |
| | 30,319 |
| | 30,319 |
|
| Other liabilities | (Level 1) | 3,426 |
| | 3,426 |
| | 4,131 |
| | 4,131 |
|
| Accrued interest payable | (Level 1) | 184 |
| | 184 |
| | 227 |
| | 227 |
|
NOTE 812 – OTHER COMPREHENSIVE INCOME (LOSS)
The following table showstables show the tax effects allocated to each component of other comprehensive income (loss) for the three months ended DecemberMarch 31, 20172023 and 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended |
| March 31, 2023 | | March 31, 2022 |
| Before-Tax
Amount | | Tax Benefit
(Expense) | | Net-of-Tax
Amount | | Before-Tax
Amount | | Tax Benefit
(Expense) | | Net-of-Tax
Amount |
| Unrealized gain (losses) on securities: | | | | | | | | | | | |
| Net unrealized gains (losses) arising during the period | $ | 1,469 | | | $ | (404) | | | $ | 1,065 | | | $ | (9,824) | | | $ | 2,701 | | | $ | (7,123) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other comprehensive income (loss) | $ | 1,469 | | | $ | (404) | | | $ | 1,065 | | | $ | (9,824) | | | $ | 2,701 | | | $ | (7,123) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Before-Tax Amount | | Tax Expense | | Net-of-Tax Amount | | Before-Tax Amount | | Tax Expense | | Net-of-Tax Amount |
| Unrealized gains (losses) on securities: | | | | | | | | | | | |
| Net unrealized (losses) gains arising during the period | $ | (654 | ) | | $ | 255 |
| | $ | (399 | ) | | $ | (2,828 | ) | | $ | 1,145 |
| | $ | (1,683 | ) |
| Less: reclassification adjustment for gains included in net income | — |
| | — |
| | — |
| | 29 |
| | (12 | ) | | 17 |
|
| Other comprehensive loss | $ | (654 | ) | | $ | 255 |
| | $ | (399 | ) | | $ | (2,799 | ) | | $ | 1,133 |
| | $ | (1,666 | ) |
The changes in the accumulated balances for each component of other comprehensive income (loss), net of tax for the twelve months ended September 30, 2017December 31, 2022 and the three months ended DecemberMarch 31, 20172023 were as follows:
| | | | | | | | | | | | | |
| Unrealized
Gains (Losses)
on AFS
Securities | | | | Other Accumulated
Comprehensive
Income (Loss), net of tax |
| Beginning Balance, January 1, 2022 | $ | 222 | | | | | $ | 161 | |
| Current year-to-date other comprehensive loss | (24,575) | | | | | (17,817) | |
| | | | | |
| Ending balance, December 31, 2022 | $ | (24,353) | | | | | $ | (17,656) | |
| Current year-to-date other comprehensive income | 1,469 | | | | | 1,065 | |
| Ending balance, March 31, 2023 | $ | (22,884) | | | | | $ | (16,591) | |
|
| | | | | | | | | | | |
| | Unrealized Gains (Losses) on Securities | | Defined Benefit Plans | | Other Accumulated Comprehensive Income (Loss) |
| Balance, October 1, 2016 | $ | 614 |
| | $ | — |
| | $ | 614 |
|
| Current year-to-date other comprehensive income (loss), net of tax | (881 | ) | | — |
| | (881 | ) |
| Ending balance, September 30, 2017 | $ | (267 | ) | | $ | — |
| | $ | (267 | ) |
| Current year-to-date other comprehensive loss, net of tax | (399 | ) | | — |
| | (399 | ) |
| Ending balance, December 31, 2017 | $ | (666 | ) | | $ | — |
| | $ | (666 | ) |
Reclassifications out of accumulated other comprehensive income (loss) for the three monthsmonth periods ended DecemberMarch 31, 20172023 and March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | |
| Details about Accumulated Other Comprehensive Income (Loss) Components | | Three months ended March 31, 2023 | | Three months ended March 31, 2022 | (1) | Affected Line Item on the Statement of Operations |
| Unrealized gains and losses | | | | | | |
| Sale of securities | | $ | — | | | $ | — | | | Net gains (losses) on investment securities |
| Tax effect | | — | | | — | | | Provision for income taxes |
| Total reclassifications for the period | | $ | — | | | $ | — | | | Net income attributable to common stockholders |
| | | | | | | | | | |
| | | | |
| | | | | | |
Details about Accumulated Other Comprehensive Income Components | | Amounts Reclassified from Accumulated Other Comprehensive Income | (1) | Affected Line Item on the Statement of Operations | | |
Unrealized gains and losses | | | | | | |
Sale of securities | | $ | — |
| | Net gain on sale of available for sale securities |
Tax Effect | | — |
| | Provision for income taxes |
Total reclassifications for the period | | $ | — |
| | Net income attributable to common shareholders |
(1) Amounts in parentheses indicate decreases to profit/loss.
Reclassifications out of accumulated other comprehensive income for the three months ended December 31, 2016 were as follows:
|
| | | | | | |
| Details about Accumulated Other Comprehensive Income Components | | Amounts Reclassified from Accumulated Other Comprehensive Income | (1) | Affected Line Item on the Statement of Operations |
| Unrealized gains and losses | | | | |
| Sale of securities | | $ | 29 |
| | Net gain on sale of available for sale securities |
| Tax Effect | | (12 | ) | | Provision for income taxes |
| Total reclassifications for the period | | $ | 17 |
| | Net income attributable to common shareholders |
(1) Amounts in parentheses indicate decreases to profit/loss.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 fiscal year ended September 30, 2017, which wasDecember 31, 2022, filed with the SEC on December 13, 2017,March 7, 2023 (“2022 10-K”), and in Item 1A of this Form 10-Q, and the following:
•conditions in the financial markets and economic conditions generally;
the possibility•reputational risk, new legislation, regulations or policy changes as a result of a deteriorationrecent volatility in the residential real estate markets;banking sector;
interest rate risk;•adverse impacts to the Company or Bank arising from the COVID-19 pandemic;
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 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•the possibility of a deterioration in the residential real estate markets;
•interest rate risk;
•lending risk;
•higher lending risks associated with our commercial and agricultural banking activities;
•the sufficiency of the allowance for credit losses;
•changes in the fair value or regulatory changes or actions, or significant litigation, adversely affecting the Bank;ratings downgrades of our securities;
increases in FDIC insurance premiums or special assessments by the FDIC;•competitive pressures among depository and other financial institutions;
•disintermediation risk;
•our ability to maintain our reputation;
•our ability to maintain or increase our market share;
•our ability to realize the benefits of net deferred tax assets;
•our inability to obtain needed liquidity;
•our ability to raise capital needed to fund growth or meet regulatory requirements;
•our ability to attract and retain key personnel;
•our ability to keep pace with technological change;
•prevalence of fraud and other financial crimes;
•cybersecurity risks;
•the possibility that our internal controls and procedures could fail or be circumvented;
•our ability to attract and retain key personnel;successfully execute our acquisition growth strategy;
our ability to keep pace with technological change;
cybersecurity risks;
•risks posed by acquisitions and other expansion opportunities;opportunities, including difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits;
•restrictions on our ability to pay dividends;
•the potential volatility of our stock price;
•accounting standards for loan losses;
•legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank;
•public company reporting obligations;
•changes in federal or state tax laws; and
•changes in accounting principles, policies or guidelines and their impact on financial performance;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.
GENERAL
The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of DecemberMarch 31, 2017,2023, and our consolidated results of operations for the three months ended DecemberMarch 31, 2017,2023, compared to the same periodperiods in the prior fiscal year for the three months ended DecemberMarch 31, 2016.2022. 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 the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on December 13, 2017.our 2022 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.
PERFORMANCE SUMMARY
The following table sets forth our results of operations and related summary information for the three month periods ended December 31, 2017 and 2016, respectively:
|
| | | | | | | |
| | Three Months Ended December 31, |
| | 2017 | | 2016 |
| Net income as reported | $ | 1,340 |
| | $ | 940 |
|
| EPS - basic, as reported | $ | 0.23 |
| | $ | 0.18 |
|
| EPS - diluted, as reported | $ | 0.23 |
| | $ | 0.18 |
|
| Cash dividends paid | $ | — |
| | $ | — |
|
| Return on average assets (annualized) | 0.57 | % | | 0.54 | % |
| Return on average equity (annualized) | 7.19 | % | | 5.81 | % |
| Efficiency ratio, as reported (1) | 75.46 | % | | 79.31 | % |
| |
(1) | The efficiency ratio is calculated as non-interest expense divided by the sum of net interest income plus non-interest income. A lower ratio indicates greater efficiency. |
Key factors behind these results were:
Total loans were $730,918 at December 31, 2017, a decrease of $2,077, or 0.28%, from their balances at September 30, 2017, due primarily to the continued shift toward a larger commercial loan portfolio and runoff of indirect loans. Total deposits were $741,069 at December 31, 2017, a decrease of $1,435, or 0.19%, from their balances at September 30, 2017. Despite the decline in total deposits, demand deposits, both interest bearing and non-interest bearing, increased from their balances at September 30, 2017.
Net loan charge-offs increased slightly from $151 for the three months ended December 31, 2016 to $183 for the three months ended December 31, 2017. Increased levels of commercial loans led to an increased provision for loan losses of $100 for the three month period ended December 31, 2017, compared to $0 for the three months ended December 31, 2016. Annualized net loan charge-offs as a percentage of average loans were 0.10% for the three months ended December 31, 2017, compared to 0.11% for the three months ended December 31, 2016.
Net interest income was $7,527 for the three month period ended December 31, 2017, an increase of $1,970 or 35.45% from the prior comparable three month period.
The net interest margin of 3.42% for the three months ended December 31, 2017 represents a 6 bp increase from a net interest margin of 3.36% for the three months ended December 31, 2016 due to higher yields on earning assets.
Non-interest income increased from $1,243 for the three months ended December 31, 2016 to $1,939 for the three months ended December 31, 2017. Growth in non-interest income is being driven by the impact of the WFC acquisition which has resulted in higher deposit charges and increased loan fees and service charges due to gain on sale of residential loan income.
Non-interest expense increased $1,750 for the three months ended December 31, 2017, compared to the three month period ended December 31, 2016. During the three months ended December 31, 2017, compensation and benefits costs increased $951 relative to the comparable prior year period, primarily due to the addition of WFC employees, despite achieving all planned WFC staff reductions. During the current three month period, occupancy expense decreased primarily due to 2017 branch closures. Amortization of intangible asset expense increased due to the premium paid for the core deposit intangible related to the WFC acquisition and the premium on the Wells Insurance Agency customer relationships for the current three month period ended December 31, 2017, compared to the same period in the prior year.
The Tax Cuts and Jobs Act of 2017 ("the Tax Act"), enacted on December 22, 2017, reduces corporate Federal income tax rates for the Company from 34% to 24.5% for 2018, and 21% for 2019. GAAP requires the impact of the provisions of the Tax Act be accounted for in the period of enactment. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we have made a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Company revalued its net deferred tax assets to account for the future impact of lower corporate taxes. For the items for which we were able to determine a reasonable estimate, we recorded an increased provisional amount of income tax expense of $275 in December 2017, related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the
unrealized loss on securities. The increase was partially offset by an approximately $135 reduction in income tax expense due to a lower corporate tax rate.
Provisional amounts. Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amounts recorded related to the re-measurement of our deferred tax balance was $275.
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 toin our Form 10-K annual report for the fiscal year ending September 30, 2017,on our 2022 10-K, our critical accounting estimates are as follows:
Allowance for Loan Losses.Credit Losses
We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), “Measurement of Credit Losses on Financial Instruments” through a cumulative-effect adjustment on January 1, 2023. We have selected a loss estimation methodology, utilizing a third-party model. See also Notes 1 and 3 to the unaudited consolidated financial statements for further discussion of our adoption of ASU 2016-13.
Allowance for Credit Losses – Held-to-Maturity Securities. Currently, all of the Company’s held-to-maturity securities are backed by governments or government agencies, for which the risk of credit loss is minimal. Accordingly, the Company does not record an allowance for credit losses on held-to-maturity securities.
Allowance for Credit Losses - Loans - We maintain an allowance for loancredit losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated probable incurredlifetime 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 AllowanceAllowances for Loan and Lease Losses,Credit losses,” issued by the Office of the Comptroller of the Currency, Department of the Treasury, Federal Financial Institutions Examination Council (FFIEC).Deposit Insurance Corporation, and National Credit Union Administration. We believe that the Bank’s Allowance for LoanCredit Losses Policy conforms to all applicable regulatory requirements. However, based on periodic examinations by regulators, the amount of the allowance for loancredit losses recorded during a particular period may be adjusted.
Our determination of the allowance for loancredit losses - loans is based on (1) specific allowancesan individual allowance for specifically identified and evaluated impaired loans and their correspondingthat management has determined have unique risk characteristics. For these loans the estimated loss is based on likelihood of default, payment history, and net realizable value of underlying collateral. Specific allocations for collateral dependent loans are based on the fair value of the underlying collateral relative to the unpaid principal balanceamortized cost of individually impairedthe 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 generalcollective allowance onfor loans not specifically identified in (1) above, based onabove. The allowance for these loans is estimated by pooling loans with a similar risk profile and calculating a collective loss rate using the pool’s risk drivers, historical loss ratios, which areexperience, and reasonable and supportable future economic forecasts to project lifetime losses. This collectively estimated loss is 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 loancredit losses - loans 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.Allowance for Credit Losses – Unfunded Commitments. The Company estimates expected credit losses over the contractual period for which the Company is exposed to credit risk, via a contractual obligation to extend credit, unless the
obligation is unconditionally cancellable by the Company. The allowance for credit losses - unfunded commitments on off-balance sheet exposures is included in other liabilities on the March 31, 2023, consolidated balance sheet.
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 themgoodwill 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 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 DecemberMarch 31, 20172023, which is related to its banking activities. The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of September 30, 2017.December 31, 2022. The Company has monitored events and conditions since December 31, 2022, and has determined that no triggering event has occurred that would require goodwill to be tested for impairment.
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.operations. Examples include but are not limited to;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 610 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. The amounts provided for income taxes is also impacted by the Company’s investment in a New Markets Tax Credit. With the adoption of ASU 2023-02 on January 1, 2023, amortization of the investment will now be recognized in the period of and proportional to recognition of the related tax credit and included in provision for income taxes. Deferred income taxes,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 DecemberMarch 31, 2017,2023, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.
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 bearingnon-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 month periodthree-month periods ended DecemberMarch 31, 20172023, and 2016,March 31, 2022, respectively.
Tax equivalent netNet interest income was $7,527 for the three months ended December 31, 2017, compared to $5,557$12.8 million for the three months ended DecemberMarch 31, 2016, respectively. 2023, compared to $13.2 million for the three months ended March 31, 2022. Net interest income for the three months ended March 31, 2023, decreased from the same period one year ago due to: 1) higher deposit and borrowing balances and costs; 2) a reduction in the accretion on purchased loans; and 3) a $0.3 million reduction in the accretion of deferred fees related to SBA Paycheck Protection Program (“SBA PPP”) loans. This was partially offset by: 1) positive loan volume variance due to growth in loans outstanding and 2) increases in loan and investment yields due to both contractual repricing and higher coupons on new loans in excess of portfolio yield.
The net interest margin for the three monththree-month period ended DecemberMarch 31, 20172023, was 3.42%3.02%, compared to 3.36%3.25% for the three monththree-month period ended DecemberMarch 31, 2016.2022. The net interest margin decrease was due to: 1) higher deposit costs due to strategic increases in deposit rates to maintain a strong deposit base and customers moving from lower cost savings and money market accounts to higher yielding certificate accounts; 2) a 6-basis point decrease in SBA PPP deferred loan fee accretion in loan yields; and 3) a 5-basis point decrease in accretion on purchased loans. This was partially offset by increases in loan and investment yields due to contractual repricings and rates on new loans and investments exceeding the portfolio as a whole.
As shown in the rate/volume analysis in the following pages, volume changes resulted in an increase of $1,856 in net interest income for the three month period ended December 31, 2017, compared to the comparable prior year period. The changes in the composition of interest earning assets resulted in an increase of $2,196 for the three month period ended December 31, 2017, compared to the same period in the prior year. Rate changes on interest earning assets increased net interest income by $268 for the three month period ended December 31, 2017, compared to the same period in the prior year. Rate changes on interest-bearing liabilities increased interest expense by $154 over the same period in the prior year, resulting in a net increase of $114 in net interest income as a result of changes in interest rates due to competitive pricing during the three month period ended December 31, 2017. Rate increases on investment securities are reflective of growth of and changes in the composition of the investment portfolio.
Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following Net Interest Income Analysisnet 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 month periodthree-month periods ended DecemberMarch 31, 2017,2023, and for the comparable prior year three month period.March 31, 2022. Non-accruing loans have been included in the table as loans carrying a zero yield.
Average interest earning assets were $879,838 for the three month period ended December 31, 2017, and $664,319 for the three month period ended December 31, 2016, respectively. Interest income on interest earning assets was $9,412 for the three month period ended December 31, 2017, compared to $6,948 for the three month period ended December 31, 2016, respectively. Interest income is comprised primarily of interest income on loans and interest income on investment securities adjusted for the tax benefit of tax-exempt securities. Interest income on loans was $8,721 for the three month period ended December 31, 2017, compared to $6,530 for the three month period ended December 31, 2016, respectively, The increase in loan interest income in the current year three month period was primarily due to an increase in loans due to the WFC acquisition. Interest income on investment securities was $513 for the three month period ended December 31, 2017 compared to $358 for the three month period ended December 31, 2016, respectively.
Average interest-bearing liabilities were $781,307 for the three month period ended December 31, 2017, compared to $576,276 for the three month period ended December 31, 2016, respectively. Interest expense on interest-bearing liabilities was $1,885 for the three month period ended December 31, 2017, compared to $1,391 for the three month period ended December 31, 2016, respectively. Interest expense increased during the current three month period compared to the comparable prior year period, primarily due to increases in rates on FHLB advances and other borrowings.
For the three months ended December 31, 2017, interest expense on interest-bearing deposits increased $182, from volume and mix changes and decreased $99 from the impact of the rate environment, resulting in an aggregate increase of $83 in interest expense on interest-bearing deposits relative to December 31, 2016. Interest expense on FHLB advances and other borrowings increased $158 from volume and mix changes and increased $253 from the impact of the rate environment during the three month period ended December 31, 2017 for an aggregate increase of $411 relative to the three month period ended December 31, 2016.
NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS
(Dollar amounts in thousands)
Three months ended DecemberMarch 31, 20172023 compared to the three months ended DecemberMarch 31, 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2023 | | Three months ended March 31, 2022 |
| 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 | $ | 18,270 | | | $ | 140 | | | 3.11 | % | | $ | 35,208 | | | $ | 13 | | | 0.15 | % |
| Loans | 1,412,409 | | | 17,126 | | | 4.92 | % | | 1,304,141 | | | 13,767 | | | 4.28 | % |
| Interest-bearing deposits | 249 | | | 1 | | | 1.63 | % | | 1,511 | | | 8 | | | 2.15 | % |
| Investment securities (1) | 270,174 | | | 2,175 | | | 3.22 | % | | 288,261 | | | 1,416 | | | 1.99 | % |
| Other investments | 16,663 | | | 231 | | | 5.62 | % | | 15,258 | | | 172 | | | 4.57 | % |
| Total interest earning assets (1) | $ | 1,717,765 | | | $ | 19,673 | | | 4.64 | % | | $ | 1,644,379 | | | $ | 15,376 | | | 3.79 | % |
| Average interest-bearing liabilities: | | | | | | | | | | | |
| Savings accounts | $ | 216,169 | | | $ | 382 | | | 0.72 | % | | $ | 233,642 | | | $ | 99 | | | 0.17 | % |
| Demand deposits | 391,635 | | | 1,432 | | | 1.48 | % | | 410,890 | | | 213 | | | 0.21 | % |
| Money market | 301,710 | | | 1,096 | | | 1.47 | % | | 299,004 | | | 216 | | | 0.29 | % |
| CD’s | 255,567 | | | 1,438 | | | 2.28 | % | | 189,185 | | | 540 | | | 1.16 | % |
| | | | | | | | | | | |
| Total deposits | $ | 1,165,081 | | | $ | 4,348 | | | 1.51 | % | | $ | 1,132,721 | | | $ | 1,068 | | | 0.38 | % |
| FHLB Advances and other borrowings | 232,166 | | | 2,530 | | | 4.42 | % | | 166,118 | | | 1,141 | | | 2.79 | % |
| Total interest-bearing liabilities | $ | 1,397,247 | | | $ | 6,878 | | | 2.00 | % | | $ | 1,298,839 | | | $ | 2,209 | | | 0.69 | % |
| Net interest income | | | $ | 12,795 | | | | | | | $ | 13,167 | | | |
| Interest rate spread | | | | | 2.64 | % | | | | | | 3.10 | % |
| Net interest margin (1) | | | | | 3.02 | % | | | | | | 3.25 | % |
| Average interest earning assets to average interest-bearing liabilities | | | | | 1.23 | | | | | | | 1.27 | |
(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 March 31, 2023, and March 31, 2022. The FTE adjustment to net interest income included in the rate calculations totaled $0 and $1 thousand for the three months ended March 31, 2023, and March 31, 2022, respectively.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, 2017 | | Three months ended December 31, 2016 |
| | 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 | $ | 30,848 |
| | $ | 67 |
| | 0.86 | % | | $ | 10,238 |
| | $ | 12 |
| | 0.47 | % |
| Loans | 733,203 |
| | 8,721 |
| | 4.72 | % | | 561,519 |
| | 6,530 |
| | 4.61 | % |
| Interest-bearing deposits | 7,714 |
| | 32 |
| | 1.65 | % | | 745 |
| | 3 |
| | 1.60 | % |
| Investment securities (1) | 100,737 |
| | 513 |
| | 2.23 | % | | 86,617 |
| | 358 |
| | 1.97 | % |
| Non-marketable equity securities, at cost | 7,336 |
| | 79 |
| | 4.27 | % | | 5,200 |
| | 45 |
| | 3.43 | % |
| Total interest earning assets | $ | 879,838 |
| | $ | 9,412 |
| | 4.27 | % | | $ | 664,319 |
| | $ | 6,948 |
| | 4.19 | % |
| Average interest-bearing liabilities: | | | | | | | | | | | |
| Savings accounts | $ | 96,230 |
| | $ | 22 |
| | 0.09 | % | | $ | 43,743 |
| | $ | 17 |
| | 0.15 | % |
| Demand deposits | 146,838 |
| | 90 |
| | 0.24 | % | | 48,989 |
| | 74 |
| | 0.60 | % |
| Money market | 123,459 |
| | 167 |
| | 0.54 | % | | 130,057 |
| | 134 |
| | 0.41 | % |
| CD’s | 263,429 |
| | 839 |
| | 1.26 | % | | 245,646 |
| | 814 |
| | 1.31 | % |
| IRA’s | 34,992 |
| | 84 |
| | 0.95 | % | | 29,000 |
| | 80 |
| | 1.09 | % |
| Total deposits | 664,948 |
| | 1,202 |
| | 0.72 | % | | 497,435 |
| | 1,119 |
| | 0.89 | % |
| FHLB Advances and other borrowings | 116,359 |
| | 683 |
| | 2.33 | % | | 78,841 |
| | 272 |
| | 1.37 | % |
| Total interest-bearing liabilities | $ | 781,307 |
| | $ | 1,885 |
| | 0.96 | % | | $ | 576,276 |
| | $ | 1,391 |
| | 0.96 | % |
| Net interest income | | | $ | 7,527 |
| | | | | | $ | 5,557 |
| | |
| Interest rate spread | | | | | 3.31 | % | | | | | | 3.23 | % |
| Net interest margin | | | | | 3.42 | % | | | | | | 3.36 | % |
| Average interest earning assets to average interest-bearing liabilities | | | | | 1.13 |
| | | | | | 1.15 |
|
Rate/Volume Analysis. The following table presentstables present 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)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)2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e., holding the initial balance constant). ChangesRate changes have been discussed previously in the net interest income section above. For the three months ended March 31, 2023, compared to the same period in 2022, the loan volume increased due to both rate andstrong organic growth. The increase in certificate volumes is due to CD growth, with some of this growth moving from money market accounts. Investment securities volume which cannot be segregated have been allocated in proportion todecreases for the relationship of the dollar amounts of the change in each category.
RATE / VOLUME ANALYSIS
(Dollar amounts in thousands)Threethree months ended DecemberMarch 31, 20172023, compared to the three months ended DecemberMarch 31, 2016.2022, are primarily due to: 1) principal repayments and 2) unrealized losses in the available for sale securities portfolio, partially offset by purchases.
|
| | | | | | | | | | | |
| | Increase (decrease) due to |
| | Volume | | Rate | | Net |
| Interest income: | | | | | |
| Cash and cash equivalents | $ | 33 |
| | $ | 22 |
| | $ | 55 |
|
| Loans | 2,038 |
| | 153 |
| | 2,191 |
|
| Interest-bearing deposits | 29 |
| | — |
| | 29 |
|
| Investment securities | 75 |
| | 80 |
| | 155 |
|
| Non-marketable equity securities, at cost | 21 |
| | 13 |
| | 34 |
|
| Total interest earning assets | 2,196 |
| | 268 |
| | 2,464 |
|
| Interest expense: | | | | | |
| Savings accounts | 16 |
| | (11 | ) | | 5 |
|
| Demand deposits | 101 |
| | (85 | ) | | 16 |
|
| Money market accounts | (7 | ) | | 40 |
| | 33 |
|
| CD’s | 57 |
| | (32 | ) | | 25 |
|
| IRA’s | 15 |
| | (11 | ) | | 4 |
|
| Total deposits | 182 |
| | (99 | ) | | 83 |
|
| FHLB Advances and other borrowings | 158 |
| | 253 |
| | 411 |
|
| Total interest bearing liabilities | 340 |
| | 154 |
| | 494 |
|
| Net interest income | $ | 1,856 |
| | $ | 114 |
| | $ | 1,970 |
|
Three months ended March 31, 2023 compared to the three months ended March 31, 2022.
| | | | | | | | | | | | | | | | | |
| | Increase (decrease) due to |
| | Volume | | Rate | | Net |
| Interest income: | | | | | |
| Cash and cash equivalents | $ | (12) | | | $ | 139 | | | $ | 127 | |
| Loans | 1,201 | | | 2,158 | | | 3,359 | |
| Interest-bearing deposits | (5) | | | (2) | | | (7) | |
| Investment securities | (94) | | | 853 | | | 759 | |
| Other investments | 17 | | | 42 | | | 59 | |
| Total interest earning assets | 1,107 | | | 3,190 | | | 4,297 | |
| Interest expense: | | | | | |
| Savings accounts | (8) | | | 291 | | | 283 | |
| Demand deposits | (10) | | | 1,229 | | | 1,219 | |
| Money market accounts | 2 | | | 878 | | | 880 | |
| CD’s | 228 | | | 670 | | | 898 | |
| | | | | |
| Total deposits | 212 | | | 3,068 | | | 3,280 | |
| FHLB Advances and other borrowings | 541 | | | 848 | | | 1,389 | |
| Total interest bearing liabilities | 753 | | | 3,916 | | | 4,669 | |
| Net interest income | $ | 354 | | | $ | (726) | | | $ | (372) | |
Provision for LoanCredit Losses. We determine our provision for loancredit losses (“provision”) based on our desire to provide an adequate allowance for loancredit losses (“ALL”ACL”) to reflect probable and inherent creditestimated lifetime losses in our loan portfolio. Withinportfolio and estimated losses on our unfunded commitments. We use a third-party model to collectively evaluate and estimate the last year, weACL on loans and unfunded commitments on a pooled basis. The model pools loans and commitments with similar characteristics and calculates an estimated loss rate for the pool based on identified risk drivers. These risk drivers vary with loan type. Projections about future economic conditions and the effect they could have experienced lower levelson future losses are inherent in the model. Loans with uniquely identified circumstances and risks are individually evaluated. Lifetime losses on these loans are estimated based on the loans’ individual characteristics.
Total provision for credit losses for the three months ended March 31, 2023, was $0.05 million, compared to no provision for the three months ended March 31, 2022. The current year’s provision is primarily the result of charge-offsgrowth in the loan portfolio, minimal net charge offs of $0.02 million, partially offset by reductions in special mention and nonperforming loans. With both localsubstandard loans and nationala reduction in unfunded commitments.
Based on loan growth and changes in economic conditions, the provision would have been $0.35 million in the first quarter of 2023. However, payments on criticized assets decreased computed reserves, reducing the provision. Continued improving economic conditions in our markets, as evidenced by unemployment rates below the national average in our two largest population centers, have resulted in improving slightlyoverall economic trends for businesses.
Note that in recent quarters and improved asset quality due to our stricter underwriting standards, we anticipate our actual charge-off experience to remain stable throughoutdiscussing ACL allocations, the remainder of the fiscal year ending September 30, 2018. However, we continue to monitor adverse general economic conditionsentire ACL balance is available for any loan that, could affect our commercial and agricultural portfolios in the future.management’s judgment, should be charged off.
Net loan charge-offs for the three month period ended December 31, 2017 were $183, compared to $151, for the comparable prior year period. Annualized net charge-offs to average loans were 0.10% for the three months ended December 31, 2017, compared to 0.11% for the comparable period in the prior year. Non-accrual loans were $6,388 at December 31, 2017, compared to $7,452 at September 30, 2017. Refer to the “Allowance for Loan Losses” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information related to non-performing loans.
We recorded a provision of $100 and $0 for the three month periods ended December 31, 2017 and December 31, 2016, respectively. Management believes that the provision takenrecorded for the current year three monthyear’s 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 make adjustments toadjust our provision, as necessary, if changing facts and circumstances require a change in the ALL.ACL. 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.ACL. If there are significant charge-offs against the ALL,ACL, or we otherwise determine that the ALLACL is inadequate, we will need to record an additional provision in the future. See the section below captioned “Allowance for Loan Losses” in this discussion for further analysis of our provision for loan losses.
Non-interest Income (Loss). The following table reflects the various components of non-interest income for the threethree- month periods ended DecemberMarch 31, 20172023 and 2016,2022, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | | | | | |
| | 2023 | | 2022 | | % Change | | | | | | |
| Non-interest Income: | | | | | | | | | | | |
| Service charges on deposit accounts | $ | 485 | | | $ | 488 | | | (0.61) | % | | | | | | |
| Interchange income | 551 | | | 549 | | | 0.36 | % | | | | | | |
| Loan servicing income | 569 | | | 701 | | | (18.83) | % | | | | | | |
| Gain on sale of loans | 298 | | | 722 | | | (58.73) | % | | | | | | |
| Loan fees and service charges | 80 | | | 92 | | | (13.04) | % | | | | | | |
| | | | | | | | | | | |
| Net gains (losses) on investment securities | 56 | | | (37) | | | N/M | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other | 253 | | | 198 | | | 27.78 | % | | | | | | |
| Total non-interest income | $ | 2,292 | | | $ | 2,713 | | | (15.52) | % | | | | | | |
|
| | | | | | | | | | |
| | Three months ended December 31, | | % |
| | 2017 | | 2016 | | Change |
| Non-interest Income: | | | | | |
| Net gain on available for sale securities | $ | — |
| | $ | 29 |
| | (100.00 | )% |
| Service charges on deposit accounts | 460 |
| | 398 |
| | 15.58 | % |
| Loan fees and service charges | 776 |
| | 533 |
| | 45.59 | % |
| Other | 703 |
| | 283 |
| | 148.41 | % |
| Total non-interest income | $ | 1,939 |
| | $ | 1,243 |
| | 55.99 | % |
The increaseLoan servicing income decreased due to reduced capitalization of $62mortgage servicing rights resulting from lower mortgage loan origination volume in service charges on deposit accounts for the three monththree-month period ended DecemberMarch 31, 2017, was2023, compared to the sameprior year period, along with lower mortgage servicing income due to servicing a smaller portfolio.
Gain on sale of loans decreased in the current three-month period ended March 31, 2023, compared to the threemonths ended March 31, 2022, due to lower mortgage loan origination volumes.
The change in net gains (losses) on investment securities between the three months ended March 31, 2023, and the three months ended March 31, 2022, is primarily due to an increasethe change in checking account related service charges. Loan fees and service charges increased $243 during the three month period ended December 31, 2017, mainly due to an increasevaluations of equity securities. There were no sales of securities in secondary market fee income generated from customer mortgage activity. Other non-interest income increased for the current three month period ended December 31, 2017 over the comparable prior year period, due to an increase in interchange income and commission fee income generated from the acquired insurance and investment services activities. Total non-interest income increased $696 during the current three month period ended December 31, 2017 over the comparable prior year period. Growth in non-interest income is being driven by the impact of the WFC acquisition which has resulted in higher deposit charges and increased loan fees and service charges due to gain on sale of residential loan income.either 2023 or 2022.
Non-interest Expense. The following table reflects the various components of non-interest expense for the three and three monththree-month periods ended DecemberMarch 31, 20172023 and 2016,2022, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | | | | | |
| | 2023 | | 2022 | | % Change | | | | | | |
| Non-interest Expense: | | | | | | | | | | | |
| Compensation and related benefits | $ | 5,338 | | | $ | 5,398 | | | (1.11) | % | | | | | | |
| Occupancy | 1,423 | | | 1,365 | | | 4.25 | % | | | | | | |
| | | | | | | | | | | |
| Data processing | 1,460 | | | 1,301 | | | 12.22 | % | | | | | | |
| Amortization of intangible assets | 204 | | | 399 | | | (48.87) | % | | | | | | |
| Mortgage servicing rights expense, net | 158 | | | (327) | | | N/M | | | | | | |
| Advertising, marketing and public relations | 136 | | | 212 | | | (35.85) | % | | | | | | |
| FDIC premium assessment | 201 | | | 115 | | | 74.78 | % | | | | | | |
| Professional services | 505 | | | 402 | | | 25.62 | % | | | | | | |
| Gains on repossessed assets, net | (29) | | | (7) | | | (314.29) | % | | | | | | |
| New market tax credit depletion | — | | | 163 | | | N/M | | | | | | |
| Other | 725 | | | 647 | | | 12.06 | % | | | | | | |
| Total non-interest expense | $ | 10,121 | | | $ | 9,668 | | | 4.69 | % | | | | | | |
| | | | | | | | | | | |
| Non-interest expense (annualized) / Average assets | 2.25 | % | | 2.24 | % | | 0.45 | % | | | | | | |
|
| | | | | | | | | | |
| | Three months ended December 31, | | % |
| | 2017 | | 2016 | | Change |
| Non-interest Expense: | | | | | |
| Compensation and benefits | $ | 3,555 |
| | $ | 2,604 |
| | 36.52 | % |
| Occupancy - net | 705 |
| | 1,068 |
| | (33.99 | ) |
| Office | 438 |
| | 281 |
| | 55.87 |
|
| Data processing | 704 |
| | 472 |
| | 49.15 |
|
| Amortization of intangible assets | 162 |
| | 43 |
| | 276.74 |
|
| Amortization of mortgage servicing rights | 90 |
| | — |
| | NA |
|
| Advertising, marketing and public relations | 149 |
| | 63 |
| | 136.51 |
|
| FDIC premium assessment | 142 |
| | 83 |
| | 71.08 |
|
| Professional services | 688 |
| | 401 |
| | 71.57 |
|
| Other | 510 |
| | 378 |
| | 34.92 |
|
| Total non-interest expense | $ | 7,143 |
| | $ | 5,393 |
| | 32.45 | % |
| | | | | | |
| Non-interest expense (annualized) / Average assets | 3.01 | % | | 3.10 | % | | (2.90 | )% |
DuringData processing expense for the three months ended DecemberMarch 31, 2017, compensation2023, increased from the three months ended March 31, 2022, due to larger asset size and benefits coststhe impact of inflationary cost increases.
Amortization of intangible assets for three months ended March 31, 2023, decreased from the three months ended March 31, 2022, as intangible assets related to certain acquisitions have been fully amortized.
Mortgage servicing rights expense, net increased $951 relativefor the three months ended March 31, 2023, compared to the comparable prior year period. DuringWhile amortization expense decreased in the current three monththree-month period compensation and benefits costs increased primarily due to the addition of WFC employees. All planned WFC staff reductions were realized by September 30, 2017. During the current three month period, occupancy expense decreased primarily due to the impact of four branch closures in the first quarter of fiscal 2017, including lease termination charges of $455, partiallylower forecasted prepayments, this decrease was more than offset by increases from the acquisition$566 thousand of WFCimpairment reversal in the fourth quarter of fiscal 2017. Office expense increased $157 over the comparable prior year period primarily due to increasedperiod.
maintenance contract costs, largely dueAdvertising, marketing and public relations expense decreased for the three months ended March 31, 2023, compared to the WFC acquisition. Advertising expenseprior year period, while yearly expenses are expected to be approximately equal.The timing of related spending will be more heavily weighted in the last three quarters of 2023 than it was in 2022.
The FDIC insurance premium increased $86 overfor the three-month period ended March 31, 2023, from the comparable prior year period due to an increased focus on advertising activities. Amortization of intangible assets expense increased for the current three month period ended December 31, 2017, compared to the same periodincrease in the prior year due to higher amortization resulting from premiums paid to acquire WFC's core deposits and Wells Insurance Agency customer relationships. Professional fees increased due to one time special project costs in fiscal 2018,FDIC assessment rate. This was partially offset by lower audit costs. Total non-interest expensethe favorable impact of increased $1,750 forbank capital ratios, largely due to both a $15 million capital injection following the Company’s subordinated debt issuance in March of 2022, and the impact of growth in the Bank’s retained earnings.
Professional services costs increased during the three monthmonths ended March 31, 2023, from the comparable prior year period ended December 31, 2017, compareddue to an increase in the sameuse of outside professionals as projects needing outside professionals increased.
In the first quarter of 2022, the Bank invested $4.1 million in a New Market Tax Credit. Based on accounting guidance at the time of investment, the related non-tax-deductible asset depletion would have occurred over a 5-year period in lockstep with the recognition of the tax credit. In March of 2023, FASB issued ASU 2023-02, which allows for proportional amortization of tax credit investments that meet certain criteria. We have determined that our New Market Tax Credit investment meets the criteria of ASU 2023-02 and have chosen to early adopt using the modified retrospective approach as of January 1, 2023. Under ASU 2023-02, the amortization of the investment is now included in income tax expense.
The increase in other expenses during the three months ended March 31, 2023, from the comparable prior year.year period is largely related to costs related to expenses to support new products and product expansion.
Income Taxes.Income tax expense was $883$1.3 million for the three months ended DecemberMarch 31, 2017,2023, compared to $467$1.5 million for the three months ended DecemberMarch 31, 2016, respectively.2022. The effective tax rate increased from 33.2% to 39.7%was 25.5% for the three month periodsthree-month period ended DecemberMarch 31, 2016 and December 31, 2017, respectively.
The Tax Cuts and Jobs Act of 2017 ("the Tax Act"), enacted on December 22, 2017, reduces corporate Federal income tax rates2023, compared to 24.2% for the Company from 34%comparable prior year period. The higher effective tax rate is due to 24.5% for 2018, and 21% for 2019. GAAP requires the impact of the provisions of theNew Market Tax Act be accounted for in the period of enactment. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we have made a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Company revalued its net deferred tax assets to account for the future impact of lower corporate taxes. For the items for which we were able to determine a reasonable estimate, we recorded an increased provisional amount of income tax expense of $275 in December 2017, related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the unrealized loss on securities. The increase was partially offset by an approximately $135 reductionCredit investment depletion, now being included in income tax expense, due to apartially offset by the impact of lower corporate tax rate.pre-tax income.
Provisional amounts. Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amounts recorded related to the re-measurement of our deferred tax balance was $275.
BALANCE SHEET ANALYSIS
Cash and Cash Equivalents. Our cash balances increased $29.7 million to $65.1 million compared to $35.4 million at December 31, 2022, as we increased our interest-bearing cash deposits at the Federal Reserve by $30 million at March 31, 2023.
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.
Securities available for sale, which represent the majority of our investment portfolio, were $173.4 million at March 31, 2023, compared with $166.0 million at December 31, 2022. The increase in the available for sale portfolio is primarily due to the purchase of $11 million, primarily floating-rate SBA backed pass-through securities, and a reduction in the unrealized loss of $1.5 million arising during the period, partially offset by principal repayments.
Securities held to maturity decreased to $95.3 million at March 31, 2023, compared to $96.4 million at December 31, 2022. This decrease was due to principal repayments. The unrealized loss on the held to maturity portfolio decreased by $1.5 million in the first quarter of 2023, to $18.1 million.
The amortized cost and market values of our available for sale securities by asset categories as of the dates indicated below were as follows:
| | | | | | | | | | | |
| Available for sale securities | Amortized
Cost | | Fair
Value |
| March 31, 2023 | | | |
| U.S. government agency obligations | $ | 25,213 | | | $ | 25,182 | |
| | | |
| Mortgage-backed securities | 96,020 | | | 78,959 | |
| Corporate debt securities | 47,141 | | | 42,215 | |
| Corporate asset-backed securities | 27,933 | | | 27,067 | |
| | | |
| Totals | $ | 196,307 | | | $ | 173,423 | |
| December 31, 2022 | | | |
| U.S. government agency obligations | $ | 18,373 | | | $ | 18,313 | |
| | | |
| Mortgage-backed securities | 97,458 | | | 78,610 | |
| Corporate debt securities | 44,636 | | | 40,251 | |
| Corporate asset-backed securities | 29,877 | | | 28,817 | |
| | | |
| Totals | $ | 190,344 | | | $ | 165,991 | |
The amortized cost and fair value of our held to maturity securities by asset categories as of the dates noted below were as follows:
| | | | | | | | | | | |
| Held to maturity securities | Amortized
Cost | | Fair
Value |
| March 31, 2023 | | | |
| | | |
| Obligations of states and political subdivisions | $ | 600 | | | $ | 555 | |
| Mortgage-backed securities | 94,701 | | | 76,628 | |
| Totals | $ | 95,301 | | | $ | 77,183 | |
| December 31, 2022 | | | |
| Obligations of states and political subdivisions | $ | 600 | | | $ | 546 | |
| Mortgage-backed securities | 95,779 | | | 76,233 | |
| Totals | $ | 96,379 | | | $ | 76,779 | |
The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Available for sale securities | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| U.S. government agency | $ | 109,544 | | | $ | 92,532 | | | $ | 112,477 | | | $ | 93,669 | |
| AAA | 8,179 | | | 7,928 | | | 8,640 | | | 8,334 | |
| AA | 31,443 | | | 30,748 | | | 24,591 | | | 23,737 | |
| A | 8,200 | | | 7,612 | | | 5,700 | | | 5,133 | |
| BBB | 38,941 | | | 34,603 | | | 38,936 | | | 35,118 | |
| | | | | | | |
| Non-rated | — | | | — | | | — | | | — | |
| Total available for sale securities | $ | 196,307 | | | $ | 173,423 | | | $ | 190,344 | | | $ | 165,991 | |
The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Held to maturity securities | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| U.S. government agency | $ | 94,701 | | | $ | 76,628 | | | $ | 95,779 | | | $ | 76,233 | |
| AAA | — | | | — | | | — | | | — | |
| AA | — | | | — | | | — | | | — | |
| A | 600 | | | 555 | | | 600 | | | 546 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | $ | 95,301 | | | $ | 77,183 | | | $ | 96,379 | | | $ | 76,779 | |
At March 31, 2023, the Bank has pledged mortgage-backed securities with a carrying value of $30.4 million as collateral against a borrowing line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit. As of March 31, 2023, the Bank has pledged U.S. Government Agency securities with a carrying value of $2.2 million and mortgage-backed securities with a carrying value of $2.1 million as collateral against specific municipal deposits. As of March 31, 2023, the Bank also has mortgage-backed securities with a carrying value of $0.1 million pledged as collateral to the Federal Home Loan Bank of Des Moines.
At December 31, 2022, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $5.4 million as collateral to secure a line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit. As of December 31, 2022, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $2.6 million and mortgage-backed securities with a carrying value of $2.2 million as collateral against specific municipal deposits. As of December 31, 2022, the Bank also has mortgage-backed securities with a carrying value of $0.1 million pledged as collateral to the Federal Home Loan Bank of Des Moines.
Loans. Total loans outstanding, net of deferred loan fees and costs decreasedand unamortized discount on acquired loans, increased by $2,077, or 0.28%,$9.2 million, to $730,918$1.42 billion as of March 31, 2023, from $1.41 billion at December 31, 2017 from $732,995 at September 30, 2017.2022. The following table reflects the composition, or mix of our loan portfolio at March 31, 2023, and December 31, 2017 and September 30, 2017:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Amount | | Percent | | Amount | | Percent |
| Real estate loans: | | | | | | | | |
| Commercial/Agricultural real estate | | | | | | | | |
| Commercial real estate | | $ | 726,748 | | | 51.1 | % | | $ | 725,971 | | | 51.5 | % |
| Agricultural real estate | | 90,958 | | | 6.4 | % | | 87,908 | | | 6.2 | % |
| Multi-family real estate | | 207,786 | | | 14.6 | % | | 208,908 | | | 14.8 | % |
| Construction and land development | | 114,951 | | | 8.1 | % | | 102,492 | | | 7.3 | % |
| Residential mortgage | | | | | | | | |
| Residential mortgage | | 110,379 | | | 7.8 | % | | 105,389 | | | 7.5 | % |
| Purchased HELOC loans | | 3,206 | | | 0.2 | % | | 3,262 | | | 0.2 | % |
| Total real estate loans | | 1,254,028 | | | 88.2 | % | | 1,233,930 | | | 87.5 | % |
| C&I/Agricultural operating and Consumer Installment Loans: | | | | | | | | |
| C&I/Agricultural operating | | | | | | | | |
| Commercial and industrial (“C&I”) | | 130,943 | | | 9.2 | % | | 136,013 | | | 9.6 | % |
| Agricultural operating | | 24,146 | | | 1.7 | % | | 28,806 | | | 2.0 | % |
| Consumer installment | | | | | | | | |
| Originated indirect paper | | 9,314 | | | 0.7 | % | | 10,236 | | | 0.7 | % |
| | | | | | | | |
| Other consumer | | 6,728 | | | 0.5 | % | | 7,150 | | | 0.5 | % |
| Total C&I/Agricultural operating and Consumer installment Loans | | 171,131 | | | 12.1 | % | | 182,205 | | | 12.8 | % |
| | | | | | | | |
| | | | | | | | |
| Gross loans | | $ | 1,425,159 | | | 100.3 | % | | $ | 1,416,135 | | | 100.3 | % |
| Unearned net deferred fees and costs and loans in process | | (2,689) | | | (0.2) | % | | (2,585) | | | (0.2) | % |
| Unamortized discount on acquired loans | | (1,515) | | | (0.1) | % | | (1,766) | | | (0.1) | % |
| Total loans (net of unearned income and deferred expense) | | 1,420,955 | | | 100.0 | % | | 1,411,784 | | | 100.0 | % |
| Allowance for credit losses | | (22,679) | | | | | (17,939) | | | |
| Total loans receivable, net | | $ | 1,398,276 | | | | | $ | 1,393,845 | | | |
|
| | | | | | | | | | | | | |
| | December 31, 2017 | | September 30, 2017 |
| | Amount | | Percent | | Amount | | Percent |
| Real estate loans: | | | | | | | |
| Residential real estate | $ | 238,045 |
| | 32.5 | % | | $ | 247,634 |
| | 33.8 | % |
| Commercial/agricultural real estate | 289,084 |
| | 39.6 | % | | 273,900 |
| | 37.4 | % |
| Total real estate loans | 527,129 |
| | 72.1 | % | | 521,534 |
| | 71.2 | % |
| Non-real estate loans: | | | | | | | |
| Consumer non-real estate | 124,944 |
| | 17.1 | % | | 135,955 |
| | 18.5 | % |
| Commercial/agricultural loans | 82,533 |
| | 11.3 | % | | 79,124 |
| | 10.8 | % |
| Total non-real estate loans | 207,477 |
| | 28.4 | % | | 215,079 |
| | 29.3 | % |
| Gross loans | 734,606 |
| |
|
| | 736,613 |
| |
|
|
| Unearned net deferred fees and costs and loans in process | 1,252 |
| | 0.2 | % | | 1,471 |
| | 0.2 | % |
| Unamortized discount on acquired loans | (4,940 | ) | | (0.7 | )% | | (5,089 | ) | | (0.7 | )% |
| Total loans (net of unearned income and deferred expense) | 730,918 |
| | 100.0 | % | | 732,995 |
| | 100.0 | % |
| Allowance for loan losses | (5,859 | ) | | | | (5,942 | ) | | |
| Total loans receivable, net | $ | 725,059 |
| | | | $ | 727,053 |
| | |
At December 31, 2017, commercial/agricultural real estate loans increased $15,184 or 5.5% from their September 30, 2017 balance. Commercial/agricultural non-real estate loans increased $3,409 or 4.3% from their September 30, 2017 balance. These increases are a result of commercial loan origination growth. Residential real estate loans decreased $9,589 or $3.9% from their September 30, 2017 balances, as paydowns outpaced residential real estate loan originations. Consumer indirect paper loans decreased $19,174 or 22.5% from their September 30, 2017 balances. The decrease in this portion of consumer
non-real estate loans relates to the Company's decision to cease originating loan volume through its indirect dealer network in fiscal 2017 and the elimination of purchased indirect loan originations.
Allowance for LoanCredit Losses.
The allowance for credit losses (“ACL”) is is a valuation allowance for current expected credit losses in the Company’s loan portfolio is our primary asset subjectas of the balance sheet date. In determining the allowance, the company estimates credit losses over the loan’s entire contractual term, adjusted for expected prepayments when appropriate. The allowance estimate considers qualitative and quantitative relevant information from internal and external sources relating to credit risk. To address this credit risk, we maintain an ALL for probablehistorical loss experience; known and inherent credit losses through periodic charges to our earnings. These charges are shownrisks in our consolidated statements of operations as PLL. See “Provisionportfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; reasonable and supportable forecasts 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 conditionsfuture conditions; and other relevant factors specificdetermined by management. To ensure that the ACL is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance. The entire ACL balance is available for any loan that, in management’s judgment, should be charged off.
The determination of the ACL requires significant judgement to estimate credit losses. The ACL on loans is measured collectively on a pooled basis when similar risk characteristics exist, and on an individual basis when management determines that the loan does not share similar risk characteristics with other loans. The ACL on loans collectively evaluated is measured using the loss rate model. The Company categorizes its loan portfolio into four segments based on similar risk characteristics. Loans within each segment are pooled based on individual loan characteristics. Aggregated risk drivers are then calculated at a pool level. Risk drivers are identified attributes that have proven to be predictive of loan loss rates and vary based on loan segment and type. A loss rate is calculated and applied to the markets in which we operate. We continuepool utilizing a model that combines the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to refine our ALL methodology by introducing a greater level of granularityproject lifetime losses. The loss rate is then combined with the loan’s balance and contractual maturity, adjusted for expected prepayments, to our loan portfolio. We currently segregate loans into poolsdetermine expected future losses. Future and supportable economic forecasts are based on commonnational economic conditions and their reversion to the mean is implicit in the model and generally occurs over a period of two years.
Qualitative adjustments are made to the allowance calculated on collectively evaluated loans to incorporate factors not included in the model. Qualitative factors include but are not limited to, lending policies and procedures, the experience and ability of lending and other staff, the volume and severity of problem credits, quality of the loan review system, and other external factors.
Loans that exhibit different risk characteristics from the pool are individually evaluated for purposesimpairment. Loans can be identified for individual evaluation for a variety of determiningreasons including delinquency, nonaccrual status, risk rating and loan modification. Accruing loans that exhibit different risk characteristics from their pool may also be within scope. On these loans, an allowance may be established so that the ALL. The additional segmentationloan is reported, net, at the lower of (a) its amortized cost; (b) the present value of the portfolio is intended to provide a more effective basis forloan’s estimated future cash flows using 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 pronouncementsloan’s existing rate; or other factors. We 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,(c) at the fair value of theany 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,collateral, less estimated disposal costs, if the loan is collateral dependent,dependent. Collateral dependency is determined using the fair valuepractical expedient when: 1) the borrower is experiencing financial difficulty; and 2) repayment is expected to be provided substantially through the sale or operation of the underlying collateral lesscollateral.
In addition, various regulatory agencies periodically review the expected costACL. These agencies may require the company to make additions to the ACL or may require that certain loan balances be charged off or downgraded into classified loan categories when the agencies’s evaluation differs from management’s evaluation based on their judgments of salecollectability from the information available to them at the time of examination.
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments using the modified retrospective method. This adoption resulted in a $4.7 million increase in the ACL on loans (“ACL - Loans”) and established a $1.5 million ACL on unfunded commitments (“ACL - Unfunded Commitments”). The increase in transition ACL is primarily due to the interaction of change from an incurred loss model to a lifetime loss model and the duration of our portfolio. Since transition, the ACL- Loans modestly increased $0.03 million to $22.7 million at March 31, 2023, representing 1.60% of loans receivable. The allowance for such collateral. Atloan losses, prior to the ASU 2016-13 transition, was $17.9 million at December 31, 20172022, representing 1.27% of loans receivable. The increase in the ACL - Loans, was due to a provision of $0.06 million, partially offset by net loan charge-offs. The ACL - Unfunded Commitments, established under ASU 2016-13, was $1.5 million at March 31, 2023. During the three months ended March 31, 2023, the ACL - Unfunded Commitments decreased $0.01 million due to a reduction in commitments.
Allowance for Credit Losses - Loans Roll Forward
(in thousands, except ratios)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 and Three Months Ended | | December 31, 2022 and Three Months Ended | | | | | | March 31, 2022 and Three Months Ended |
| Allowance for Credit Losses (“ACL”) | | | | | | | | | | |
| ACL - Loans, at beginning of period | | $ | 17,939 | | | $ | 17,217 | | | | | | | $ | 16,913 | |
| Cumulative effect of ASU 2016-13 adoption | | 4,706 | | | — | | | | | | | — | |
| Loans charged off: | | | | | | | | | | |
| Commercial/Agricultural real estate | | (32) | | | — | | | | | | | (35) | |
| C&I/Agricultural operating | | — | | | (36) | | | | | | | (63) | |
| Residential mortgage | | (14) | | | — | | | | | | | (12) | |
| Consumer installment | | (11) | | | (14) | | | | | | | (9) | |
| Total loans charged off | | (57) | | | (50) | | | | | | | (119) | |
| Recoveries of loans previously charged off: | | | | | | | | | | |
| Commercial/Agricultural real estate | | 3 | | | 62 | | | | | | | 3 | |
| C&I/Agricultural operating | | 15 | | | 8 | | | | | | | 10 | |
| Residential mortgage | | 4 | | | — | | | | | | | 1 | |
| Consumer installment | | 12 | | | 2 | | | | | | | 10 | |
| Total recoveries of loans previously charged off: | | 34 | | | 72 | | | | | | | 24 | |
| Net loans charged off (“NCOs”) | | (23) | | | 22 | | | | | | | (95) | |
| Additions to ACL - Loans via provision for credit losses charged to operations | | 57 | | | 700 | | | | | | | — | |
| ACL - Loans, at end of period | | $ | 22,679 | | | $ | 17,939 | | | | | | | $ | 16,818 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Average outstanding loan balance | | $ | 1,421,096 | | | $ | 1,399,244 | | | | | | | $ | 1,304,141 | |
| Ratios: | | | | | | | | | | |
| NCOs (annualized) to average loans | | 0.01 | % | | (0.01) | % | | | | | | 0.03 | % |
Allowance for Credit Losses - Loans Activity by Segment
(in thousands, except ratios)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial/Agricultural Real Estate | | C&I/Agricultural operating | | Residential Mortgage | | Consumer Installment | | Unallocated | | Total |
| Three months ended March 31, 2023 | | | | | | | | | | | |
| Allowance for Credit Losses - Loans: | | | | | | | | | | | |
| ACL - Loans, at beginning of period | $ | 14,085 | | | $ | 2,318 | | | $ | 599 | | | $ | 129 | | | $ | 808 | | | $ | 17,939 | |
| Cumulative effect of ASU 2016-13 adoption | 4,510 | | | (331) | | | 1,119 | | | 216 | | | (808) | | | 4,706 | |
| Charge-offs | (32) | | | — | | | (14) | | | (11) | | | — | | | (57) | |
| Recoveries | 3 | | | 15 | | | 4 | | | 12 | | | — | | | 34 | |
| Additions to ACL - Loans via provision for credit losses charged to operations | (70) | | | (154) | | | 292 | | | (11) | | | — | | | 57 | |
| ACL - Loans, at end of period | $ | 18,496 | | | $ | 1,848 | | | $ | 2,000 | | | $ | 335 | | | $ | — | | | $ | 22,679 | |
Allowance for Credit Losses - Loans to Percentage
(in thousands, except ratios)
| | | | | | | | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 | | | | |
| Loans, end of period | | $ | 1,420,955 | | | $ | 1,411,784 | | | | | |
| ACL - Loans | | $ | 22,679 | | | $ | 17,939 | | | | | |
| ACL - Loans to loans, end of period | | 1.60 | % | | 1.27 | % | | | | |
Allowance for Credit Losses - Unfunded Commitments:
(in thousands)
In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $1,530 at March 31, 2023 and September 30, 2017, we had 119 and 134 such impaired loans, all secured by real estate or personal property with an aggregate recorded investment of $6,880 and $7,510, respectively. Of the impaired loans, respectively, there were 28 such individual loans where estimated fair value was less than their book value (i.e. we deemed impairment to exist) totaling $1,793 for which $299 in specific ALL was recorded as of$0 at December 31, 2017.
At December 31, 2017, the ALL was $5,859, or 0.80% of our total loan portfolio, compared to ALL of $5,942, or 0.81% of the total loan portfolio at September 30, 2017. This level was based on our analysis of the loan portfolio risk at December 31, 2017, taking into account the factors discussed above. At December 31, 2017, the ALL was 0.83% of our total loan portfolio, excluding the third party purchased consumer loans referenced elsewhere herein, compared to 0.84% of the total loan portfolio excluding these third party purchased consumer loans at September 30, 2017. We have established a separate restricted reserve account for these third party purchased consumer loans. The funds2022, classified in the reserve account are to be released to compensate the Bank for any nonperforming purchased loans that are not purchased back by the seller or substituted with performing loans and are ultimately charged off.
All of the nine factors identified in the FFIEC's Interagency Policy Statementother liabilities 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. 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.consolidated balance sheets.
| | | | | | | | | | | | | | |
| | March 31, 2023 and Three Months Ended | | December 31, 2022 and Three Months Ended |
| ACL - Unfunded commitments - beginning of period | | $ | — | | | $ | — | |
| Cumulative effect of ASU 2016-13 adoption | | 1,537 | | | — | |
| Reductions to ACL - Unfunded commitments via provision for credit losses charged to operations | | (7) | | | — | |
| ACL - Unfunded commitments - end of period | | $ | 1,530 | | | $ | — | |
Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of non-accrualnonaccrual and problem loans in order to minimize the Bank'sBank’s risk of loss. Non-performingNonperforming loans are defined as non-accrualnonaccrual 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;
•Commercial/agricultural non-real estateC&I/Agricultural operating loans, past due 90 days or more;
•Closed ended consumer non-real estateinstallment loans, past due 120 days or more; and
•Residential real estatemortgage loans and open endedopen-ended consumer non-real estateinstallment 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. The Company adopted ASU 2022-02 on January 1, 2023, which eliminated special accounting rules for TDRs. Prior to the elimination of the special accounting rules, TDR loans were accounted for under ASC 310-40. A TDR typically involvesinvolved 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 involvehave involved 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.
The following table identifies the various components of non-performingnonperforming assets and other balance sheet information as of the dates indicated below and changes in the ALLACL for the periods then ended:
| | | | | | | | | | | |
| March 31, 2023 and Three Months Then Ended (1) | | December 31, 2022 and Twelve Months Then Ended (2) |
| Nonperforming assets: | | | |
| Nonaccrual loans | | | |
| Commercial real estate | $ | 5,515 | | | $ | 5,736 | |
| Agricultural real estate | 2,495 | | | 2,742 | |
| Construction and land development | — | | | — | |
| Commercial and industrial | 450 | | | 552 | |
| Agricultural operating | 794 | | | 890 | |
| Residential mortgage | 1,133 | | | 1,253 | |
| Consumer installment | 23 | | | 31 | |
| Total nonaccrual loans | $ | 10,410 | | | $ | 11,204 | |
| Accruing loans past due 90 days or more | 224 | | | 246 | |
| Total nonperforming loans (“NPLs”) | 10,634 | | | 11,450 | |
| Other real estate owned | 1,113 | | | 1,265 | |
| Other collateral owned | — | | | 6 | |
| Total nonperforming assets (“NPAs”) | $ | 11,747 | | | $ | 12,721 | |
| | | |
| | | |
| | | |
| Average outstanding loan balance | $ | 1,421,096 | | | $ | 1,351,052 | |
| Loans, end of period | $ | 1,420,955 | | | $ | 1,411,784 | |
| Total assets, end of period | $ | 1,860,720 | | | $ | 1,816,386 | |
| ACL - Loans, at beginning of period | $ | 17,939 | | | $ | 16,913 | |
| Cumulative effect of ASU 2016-13 adoption | 4,706 | | | — | |
| Loans charged off: | | | |
| Commercial/Agricultural real estate | (32) | | | (205) | |
| C&I/Agricultural operating | — | | | (346) | |
| Residential mortgage | (14) | | | (68) | |
| Consumer installment | (11) | | | (48) | |
| Total loans charged off | (57) | | | (667) | |
| Recoveries of loans previously charged off: | | | |
| Commercial/Agricultural real estate | 3 | | | 102 | |
| C&I/Agricultural operating | 15 | | | 36 | |
| Residential mortgage | 4 | | | 29 | |
| Consumer installment | 12 | | | 51 | |
| Total recoveries of loans previously charged off: | 34 | | | 218 | |
| Net loans charged off (“NCOs”) | (23) | | | (449) | |
| Additions to ACL - loans via provision for credit losses charged to operations | 57 | | | 1,475 | |
| ACL - Loans, at end of period | $ | 22,679 | | | $ | 17,939 | |
| Ratios: | | | |
| ALL to NCOs (annualized) | 24,313.40 | % | | 3,995.32 | % |
| NCOs (annualized) to average loans | 0.01 | % | | 0.03 | % |
| ALL to total loans | 1.60 | % | | 1.27 | % |
| NPLs to total loans | 0.75 | % | | 0.81 | % |
| NPAs to total assets | 0.63 | % | | 0.70 | % |
|
| | | | | | | |
| | December 31, 2017
and Three Months
Then Ended | | September 30, 2017
and Twelve Months
Then Ended |
| Nonperforming assets: | | | |
| Nonaccrual loans | $ | 6,388 |
| | $ | 7,452 |
|
| Accruing loans past due 90 days or more | 739 |
| | 589 |
|
| Total nonperforming loans (“NPLs”) | 7,127 |
| | 8,041 |
|
| Other real estate owned | 6,996 |
| | 5,962 |
|
| Other collateral owned | 35 |
| | 55 |
|
| Total nonperforming assets (“NPAs”) | $ | 14,158 |
| | $ | 14,058 |
|
| Troubled Debt Restructurings (“TDRs”) | $ | 7,263 |
| | $ | 5,851 |
|
| Nonaccrual TDRs | $ | 1,327 |
| | $ | 621 |
|
| Average outstanding loan balance | $ | 731,957 |
| | $ | 653,717 |
|
| Loans, end of period | $ | 730,918 |
| | $ | 732,995 |
|
| Total assets, end of period | $ | 943,032 |
| | $ | 940,664 |
|
| ALL, at beginning of period | $ | 5,942 |
| | $ | 6,068 |
|
| Loans charged off: | | | |
| Residential real estate | (24 | ) | | (233 | ) |
| Commercial/Agricultural real estate | (1 | ) | | (389 | ) |
| Consumer non-real estate | (194 | ) | | (9 | ) |
| Commercial/Agricultural non-real estate | — |
| | — |
|
| Total loans charged off | (219 | ) | | (631 | ) |
| Recoveries of loans previously charged off: | | | |
| Residential real estate | 13 |
| | 14 |
|
| Commercial/Agricultural real estate | — |
| | — |
|
| Consumer non-real estate | 22 |
| | 171 |
|
| Commercial/Agricultural non-real estate | 1 |
| | 1 |
|
| Total recoveries of loans previously charged off: | 36 |
| | 186 |
|
| Net loans charged off (“NCOs”) | (183 | ) | | (445 | ) |
| Additions to ALL via provision for loan losses charged to operations | 100 |
| | 319 |
|
| ALL, at end of period | $ | 5,859 |
| | $ | 5,942 |
|
| Ratios: | | | |
| ALL to NCOs (annualized) | 800.41 | % | | 1,335.28 | % |
| NCOs (annualized) to average loans | 0.10 | % | | 0.07 | % |
| ALL to total loans | 0.80 | % | | 0.81 | % |
| NPLs to total loans | 0.98 | % | | 1.10 | % |
| NPAs to total assets | 1.50 | % | | 1.49 | % |
(2) Loan balances are stated at the unpaid principal balance of the loan.
An aging analysis of the Company’s originated and acquiredNonaccrual Loans Roll Forward:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended |
| | March 31, 2023 | | December 31, 2022 | | September 30, 2022 | | June 30,
2022 | | March 31, 2022 |
| Balance, beginning of period | $ | 11,204 | | | $ | 10,772 | | | $ | 10,434 | | | $ | 11,858 | | | $ | 11,665 | |
| Additions | 154 | | | 1,039 | | | 257 | | | 1,918 | | | 720 | |
| Acquired nonaccrual loans | — | | | — | | | — | | | — | | | — | |
| Charge offs | (49) | | | (37) | | | (4) | | | (437) | | | (15) | |
| Transfers to OREO | (25) | | | — | | | (27) | | | (65) | | | — | |
| Return to accrual status | (252) | | | — | | | (117) | | | — | | | (51) | |
| Repurchases of government guaranteed loans | — | | | — | | | 517 | | | — | | | — | |
| Payments received | (527) | | | (561) | | | (288) | | | (2,830) | | | (461) | |
| Other, net | (95) | | | (9) | | | — | | | (10) | | | — | |
| Balance, end of period | $ | 10,410 | | | $ | 11,204 | | | $ | 10,772 | | | $ | 10,434 | | | $ | 11,858 | |
Nonaccrual loans as ofdecreased by $0.7 million at March 31, 2023, from $11.2 million December 31, 2017 and September 30, 2017, respectively, was as follows
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 Days
Past Due | | 60-89 Days
Past Due | | Greater
Than
89 Days | | Total
Past Due | | Nonaccrual Loans | | Recorded Investment > 89 Days and Accruing |
| December 31, 2017 | | | | | | | | | | | |
| Originated loans | $ | 4,640 |
| | $ | 1,276 |
| | $ | 1,716 |
| | $ | 7,632 |
| | $ | 1,751 |
| | $ | 436 |
|
| Acquired loans | 4,998 |
| | 823 |
| | 2,042 |
| | 7,863 |
| | 4,637 |
| | 303 |
|
| Total | $ | 9,638 |
| | $ | 2,099 |
| | $ | 3,758 |
| | $ | 15,495 |
| | $ | 6,388 |
| | $ | 739 |
|
| September 30, 2017 | | | | | | | | | | | |
| Originated loans | $ | 3,376 |
| | $ | 725 |
| | $ | 1,744 |
| | $ | 5,845 |
| | $ | 1,785 |
| | $ | 458 |
|
| Acquired loans | 2,053 |
| | 257 |
| | 2,848 |
| | 5,158 |
| | 5,667 |
| | 131 |
|
| Total | $ | 5,429 |
| | $ | 982 |
| 982 |
| $ | 4,592 |
| | $ | 11,003 |
| | $ | 7,452 |
| | $ | 589 |
|
Non-performing loans2022. As seen above, this is largely due to payments received with only modest new additions. Nonperforming assets decreased to $11.7 million or 0.63% of $7,127total assets at March 31, 2023, compared to $12.7 million, or 0.70% of total assets at December 31, 2017, which included $1,327 of non-accrual troubled debt restructured originated loans, reflected a decrease of $914 from the non-performing loans balance of $8,041 at September 30, 2017. The decrease was partially due2022.
Refer to the resolution“Allowance for Credit Losses” and pay down on“Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections above for more information related to nonperforming loans.
Below is a single large commercial credit account. Mostsummary of these non-performing loan relationships are secured primarily by collateral including residential real estate and commercial or agricultural assets.
Other real estate owned ("OREO") increased by $1,034, from $5,962 at September 30, 2017modifications made to $6,996 at December 31, 2017. Other collateral owned decreased $20borrowers experiencing financial difficulty during the three months ended March 31, 2023.
| | | | | | | | | | | | | | |
| | Term Extension |
| Loan Class | | Amortized Cost Basis at
March 31, 2023 | | % of Total Class of Financing Receivables |
| Commercial real estate | | $ | 5,359 | | | 0.74 | % |
| Commercial and industrial | | $ | 25 | | | 0.02 | % |
| Residential mortgage | | $ | 38 | | | 0.03 | % |
| | | | |
| | Other-Than-Insignificant Payment Delay |
| Loan Class | | Amortized Cost Basis at
March 31, 2023 | | % of Total Class of Financing Receivables |
| Other consumer | | $ | 22 | | | 0.33 | % |
Included in the nonaccrual loans roll forward table above, for periods prior to the January 1, 2023 adoption of ASU 2022-02 are nonaccrual TDR loans. Nonaccrual TDR loans were $2.6 million at December 31, 2017 to $352022.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | | | |
| | | | | | Number of
Modifications | | Recorded
Investment | | | | | | | | |
| Troubled debt restructurings: Accrual Status | | | | | | | | | | | | | | | |
| Commercial/Agricultural real estate | | | | | 10 | | | $ | 1,336 | | | | | | | | | |
| C&I/Agricultural operating | | | | | 5 | | | 960 | | | | | | | | | |
| Residential mortgage | | | | | 36 | | | 2,875 | | | | | | | | | |
| Consumer installment | | | | | — | | | — | | | | | | | | | |
| Total loans | | | | | 51 | | | $ | 5,171 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Accruing troubled debt restructurings were $5.2 million at December 31, 2022.
The table below shows a summary of criticized loans for the past five quarters. In the second quarter of 2022, two loans became categorized as special mention. One is a commercial real estate loan secured by a hotel (50% LTV at origination) and has rebounded more slowly from the Septemberpandemic due to reliance on seasonal events and company meetings. Performance year to date and current bookings show good progress. The second special mention loan is a $10.4 million fully secured working capital C&I loan. In the third quarter of 2022, this loan increased its outstanding balance by $2.4 million with a draw on a secured line of credit. The loan was categorized as special mention at June 30, 2017 balance2022, and was paid off in the first quarter of $55. 2023.The increasedecrease in OREOsubstandard loan balances from December 31, 2022 is due to a decrease in non-performing loans along with the receipt of payments. See Note 3, “Loans and Allowance for Credit Losses” for additional information.
In addition to our discussion of criticized, special mention, and substandard loans above, we are disclosing the following information about our loans to certain industries. As of March 31, 2023, hotel loans totaled $92 million with a weighted average LTV of 56% and average size of $3.4 million. Restaurant loans totaled $48 million, at March 31, 2023. The weighted-average LTV percentage on these restaurant loans was 54% and the average loan size was $689 thousand. Approximately $35.0 million of restaurant loans are to franchise quick-service restaurants. At March 31, 2023 we have $45 million of office loans with a weighted average LTV of 65% and average loan size of $626 thousand. The office properties are not located in large cities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) |
| (Loan balance at unpaid principal balance) | | March 31,
2023 | | December 31,
2022 | | September 30,
2022 | | June 30,
2022 | | March 31,
2022 |
| Special mention loan balances | | $ | 6,636 | | | $ | 12,170 | | | $ | 20,178 | | | $ | 17,274 | | | $ | 1,849 | |
| Substandard loan balances | | 15,439 | | | 17,319 | | | 20,227 | | | 20,680 | | | 24,822 | |
| Criticized loans, end of period | | $ | 22,075 | | | $ | 29,489 | | | $ | 40,405 | | | $ | 37,954 | | | $ | 26,671 | |
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 $5.7 million at December 31, 2022, to $5.5 million at March 31, 2023, primarily due to a reduction in size of the transfer into OREO of a closed branch, acquired from Wells Financial, partially offset by salesservicing portfolio as principal repayments exceeded new servicing rights. At March 31, 2023 and writedowns on OREO properties.
Our non-performing assets were $14,158 at December 31, 20172022, the Company did not have an MSR impairment, or related valuation allowance.
The unpaid balances of one- to four-family residential real estate loans serviced for others as of March 31, 2023, and December 31, 2022, were $513.8 million and $523.7 million, respectively. The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at March 31, 2023 and December 31, 2022, was 1.07% and 1.08%, respectively.
Deposits. From a month-end perspective, deposits remained stable. From March 7, 2023 to March 31, 2023, a period closely monitored for unusual withdrawal activity, balances remained stable. Deposit composition changed during the quarter ended March 31, 2023, as both business and retail depositors sought higher yields on deposit accounts. For the quarter, retail deposits remained stable, with customers returning to higher yielding certificates with money moving from money market and savings accounts to certificate accounts. In January 2023, commercial non-interest bearing deposits fell as commercial customers decreased their cash balances to support the needs of their businesses. Modest brokered deposit growth supplemented deposit growth, with $10 million of brokered money market growth and $14.5 million of brokered certificate growth.
Consumer, commercial and government deposits have been stable since January 31, 2023 and since the two large coastal bank failures in early March. There are no material customer or 1.50%industry concentrations. A decrease in deposits during January occurred as commercial customers decreased their cash balances to support the needs of their businesses.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | February 28, 2023 | | January 31, 2023 | | December 31, 2022 |
| Consumer deposits | | $ | 786,614 | | | $ | 784,162 | | | $ | 779,476 | | | $ | 805,598 | |
| Commercial deposits | | 391,534 | | | 388,770 | | | 385,071 | | | 405,733 | |
| Public deposits | | 194,683 | | | 193,213 | | | 195,115 | | | 173,548 | |
| Brokered deposits | | 63,962 | | | 53,963 | | | 39,841 | | | 39,841 | |
| Total deposits | | $ | 1,436,793 | | | $ | 1,420,108 | | | $ | 1,399,503 | | | $ | 1,424,720 | |
At March 31, 2023 our deposit portfolio composition was 55% consumer, 27% commercial, 14% public and 4% brokered deposits. At December 31, 2022 our deposit portfolio composition was 57% consumer, 28% commercial, 12% public and 3% brokered deposits.
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Non-interest bearing demand deposits | | $ | 247,735 | | | $ | 284,722 | |
| Interest bearing demand deposits | | 390,730 | | | 371,210 | |
| Savings accounts | | 214,537 | | | 220,019 | |
| Money market accounts | | 309,005 | | | 323,435 | |
| Certificate accounts | | 274,786 | | | 225,334 | |
| Total deposits | | $ | 1,436,793 | | | $ | 1,424,720 | |
| | | | |
Uninsured and uncollateralized deposits were $252.7 million, or 18% of total assets, compared to $14,058,deposits, at March 31, 2023 and $298.8 million, or 1.49%21% of total assets at September 30, 2017. The increase in non-performing assets since September 30, 2017 was primarily due to the transfer into OREO of a closed branch, acquired from Wells Financial, partially offset by the impact of pay downs on non-performing loans.
Net charge offs for the three month period ended December 31, 2017 were $183, compared to $151 for the same prior year period. The ratio of annualized net charge-offs to average loans receivable was 0.10% for the three month period ended December 31, 2017, compared to 0.07% for the twelve months ended September 30, 2017.
Investment Securities. We manage our securities portfolio in an effort to enhance income and provide liquidity. Our investment portfolio is comprised of securities available for sale and securities held to maturity. The weighted average life of the investment portfolio was 4.7 yearsdeposits, at December 31, 2017, compared with 4.6 years2022. Uninsured deposits at September 30, 2017. The modified durationMarch 31, 2023 were $413.5 million, or 29% of the investment portfolio was 4.3 yearstotal deposits, and $441.2 million, or 31% of total deposits at December 31, 2017, compared2022, with 4.1 yearsthe difference from the above sentence being fully secured government deposits.
On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $517.4 million, or 205% of uninsured and uncollateralized deposits at September 30, 2017.
Securities held to maturity were $5,227 atMarch 31, 2023. At December 31, 2017, compared with $5,453 at September 30, 2017. Securities available for sale, which represent the majority2022 on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $570.0 million, or 191% of our investment portfolio, were $96,548 at December 31, 2017, compared with $95,883 at September 30, 2017.uninsured and uncollateralized deposits.
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 |
| December 31, 2017 | | | |
| U.S. government agency obligations | $ | 18,098 |
| | $ | 17,591 |
|
| Obligations of states and political subdivisions | 35,519 |
| | 35,414 |
|
| Mortgage backed securities | 38,490 |
| | 38,020 |
|
| Agency securities | 147 |
| | 234 |
|
| Corporate debt securities | 5,393 |
| | 5,289 |
|
| Totals | $ | 97,647 |
| | $ | 96,548 |
|
| September 30, 2017 | | | |
| U.S. government agency obligations | $ | 18,454 |
| | $ | 18,041 |
|
| Obligations of states and political subdivisions | 35,656 |
| | 35,795 |
|
| Mortgage backed securities | 36,661 |
| | 36,474 |
|
| Agency securities | 147 |
| | 230 |
|
| Corporate debt securities | 5,410 |
| | 5,343 |
|
| Totals | $ | 96,328 |
| | $ | 95,883 |
|
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 |
| December 31, 2017 | | | |
| Obligations of states and political subdivisions | $ | 1,310 |
| | $ | 1,309 |
|
| Mortgage-backed securities | 3,917 |
| | 4,012 |
|
| Totals | $ | 5,227 |
| | $ | 5,321 |
|
| September 30, 2017 | | | |
| Obligations of states and political subdivisions | $ | 1,311 |
| | $ | 1,328 |
|
| Mortgage-backed securities | 4,142 |
| | 4,277 |
|
| Totals | $ | 5,453 |
| | $ | 5,605 |
|
The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows: |
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | September 30, 2017 |
| Available for sale securities | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| Agency | $ | 56,588 |
| | $ | 55,611 |
| | $ | 55,115 |
| | $ | 54,515 |
|
| AAA | 724 |
| | 719 |
| | 725 |
| | 730 |
|
| AA | 26,354 |
| | 26,275 |
| | 26,405 |
| | 26,474 |
|
| A | 11,343 |
| | 11,317 |
| | 7,776 |
| | 7,876 |
|
| BBB | — |
| | — |
| | 3,618 |
| | 3,579 |
|
| Non-rated | 2,638 |
| | 2,626 |
| | 2,689 |
| | 2,709 |
|
| Total available for sale securities | $ | 97,647 |
| | $ | 96,548 |
| | $ | 96,328 |
| | $ | 95,883 |
|
The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows:
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | September 30, 2017 |
| Securities held to maturity | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| U.S. government agency | $ | 3,917 |
| | $ | 4,012 |
| | $ | 4,142 |
| | $ | 4,277 |
|
| AAA | — |
| | — |
| | — |
| | — |
|
| AA | — |
| | — |
| | — |
| | — |
|
| A | 960 |
| | 959 |
| | 961 |
| | 969 |
|
| BBB | — |
| | — |
| | — |
| | — |
|
| Below investment grade | — |
| | — |
| | — |
| | — |
|
| Non-rated | 350 |
| | 350 |
| | 350 |
| | 359 |
|
| Total | $ | 5,227 |
| | $ | 5,321 |
| | $ | 5,453 |
| | $ | 5,605 |
|
At December 31, 2017, securities with a market value of $2,500 were pledged against a line of credit with the Federal Reserve Bank of Minneapolis. As of December 31, 2017, this line of credit had a zero balance. The Bank has pledged U.S. Government Agency securities with a market value of $7,421 and mortgage-backed securities with a market value of $18,836 as collateral against specific municipal deposits. As of December 31, 2017, the Bank also has mortgage backed securities with a market value of 1,229 pledged as collateral to the Federal Home Loan Bank of Des Moine against the MPF Credit Enhancement fee.
Deposits. Deposits decreased to $741,069 at December 31, 2017, from $742,504 at September 30, 2017, largely due to deposit runoff in markets where branch closures took place.
The following is a summary of deposits by type at December 31, 2017 and September 30, 2017, respectively:
|
| | | | | | | | |
| | | December 31, 2017 | | September 30, 2017 |
| Non-interest bearing demand deposits | | $ | 78,685 |
| | $ | 75,318 |
|
| Interest bearing demand deposits | | 149,058 |
| | 147,912 |
|
| Savings accounts | | 98,941 |
| | 102,756 |
|
| Money market accounts | | 125,831 |
| | 125,749 |
|
| Certificate accounts | | 288,554 |
| | 290,769 |
|
| Total deposits | | $ | 741,069 |
| | $ | 742,504 |
|
Deposits from closed branches, in markets that the Bank no longer competes in, decreased by $4,506 during the three months ended December 31, 2017, and total $47,952 as of December 31, 2017. Noninterest bearing deposits increased to $78,685 at December 31, 2017, compared to $75,318 at September 30, 2017. Non-maturity deposits increased to $452,515 or 61.1% of total deposits compared to $451,735 at September 30, 2017, or 60.8% of total deposits.
Our objective is to grow core deposits and build customer relationships in our core markets by expanding our branch network, deposit product offerings, including Treasury Management, and providing excellent customer service. Management expects to continue to place emphasis on both retaining and generating additional core deposits in 2018 through competitive pricing of deposit products, our branch delivery systems that have already been established and electronic banking.
Institutional certificates of deposit as a funding source decreased to $12,910 at December 31, 2017 from $14,402 as of September 30, 2017. Institutional certificates of deposit remain a part of our deposit mix as we continue to pursue funding sources to lower the Bank's cost of funds.
The Bank had $37,475 and $42,840 in brokered deposits at December 31, 2017 and September 30, 2017, respectively. Brokered deposit levels are within all regulatory directives thereon.
Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings.A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at March 31, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Stated Maturity | | Amount | | Range of Stated Rates | | Stated Maturity | | Amount | | Range of Stated Rates |
| Federal Home Loan Bank advances (1), (2), (3) | | 2023 | | $ | 157,000 | | | 1.43 | % | | 4.92 | % | | 2023 | | $ | 117,000 | | | 1.43 | % | | 4.31 | % |
| | 2024 | | 20,530 | | | 0.00 | % | | 1.45 | % | | 2024 | | 20,530 | | | 0.00 | % | | 1.45 | % |
| | 2025 | | 5,000 | | | 1.45 | % | | 1.45 | % | | 2025 | | 5,000 | | | 1.45 | % | | 1.45 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Federal Home Loan Bank advances | | | | $ | 182,530 | | | | | | | | | $ | 142,530 | | | | | |
| | | | | | | | | | | | | | | | |
| Senior Notes (4) | | 2034 | | $ | 18,083 | | | 6.75 | % | | 7.25 | % | | 2034 | | $ | 23,250 | | | 3.00 | % | | 6.75 | % |
| | | | | | | | | | | | | | | | |
| Subordinated Notes (5) | | 2030 | | $ | 15,000 | | | 6.00 | % | | 6.00 | % | | 2030 | | $ | 15,000 | | | 6.00 | % | | 6.00 | % |
| | 2032 | | 35,000 | | | 4.75 | % | | 4.75 | % | | 2032 | | 35,000 | | | 4.75 | % | | 4.75 | % |
| | | | | | | | | | | | | | | | |
| | | | $ | 50,000 | | | | | | | | | $ | 50,000 | | | | | |
| | | | | | | | | | | | | | | | |
| Unamortized debt issuance costs | | | | (783) | | | | | | | | | (841) | | | | | |
| Total other borrowings | | | | $ | 67,300 | | | | | | | | | $ | 72,409 | | | | | |
| | | | | | | | | | | | | | | | |
| Totals | | | | $ | 249,830 | | | | | | | | | $ | 214,939 | | | | | |
(1) The FHLB advances were $94,000bear 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 $1,017,535 and $984,878 at March 31, 2023 and December 31, 2022, respectively. At March 31, 2023, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $213,372 compared to $256,773 as of December 31, 20172022.
(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $182,530 and $90,000$157,530, during the three months ended March 31, 2023 and the twelve months ended December 31, 2022, respectively.
(3) The weighted-average interest rate on FHLB borrowings maturing within twelve months as of March 31, 2023 and December 31, 2022 were 4.55% and 4.09%, respectively.
(4) Senior notes, entered into by the Company in June 2019 consist of the following:
(a) A term note, which was subsequently refinanced in March 2022 and modified in February of 2023, requiring quarterly interest-only payments through March 2027, and quarterly principal and interest payments thereafter. Interest is variable, based on US Prime rate minus 75 basis points with a floor rate of 3.00%.
(b) A $5,000 line of credit, maturing August 1, 2023, that remains undrawn upon.
(5) Subordinated notes resulted from the following:
(a) 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 30, 2017,2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.
(b) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in March 2022, which bears a fixed interest rate of 4.75% for five years. In April 2027, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 329 basis points. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.
FHLB advances increased $40.0 million to $182.5 million as we continueof March 31, 2023, compared to utilize these$142.5 million as of December 31, 2022. The increase is due to loan growth, as well as the Bank’s desire to manage it’s liquidity and increase cash on hand in response to recent events. The Bank had $47 million of FHLB advances maturing overnight as necessary, to supplement core deposits to meet our funding and liquidity needs, and as we evaluate all options to lower the Bank's cost of funds.March 31, 2023. 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"(“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 bearinginterest-bearing deposit balances. The Bank’s current unused borrowing capacity, supported by loan collateral as of March 31, 2023, is approximately $213.4 million.
At March 31, 2023 and December 31 2017,2022, the Bank had the ability to borrow $19.9 million and $4.1 million from the Federal Reserve Bank of Minneapolis. The ability to borrow is approximately $185,236.based on mortgage-backed securities pledged with a carrying value of $30.4 million and $5.4 million as of March 31, 2023 and December 31, 2022, respectively. There were no Federal Reserve borrowings outstanding on these as of March 31, 2023 or December 31, 2022. In addition, The Bank has been approved to obtain funding from the Federal Reserve’s new Bank Term Funding Program (“BTFP”). As of March 31, 2023, the Bank has not borrowed from this facility and has not pledged any collateral to this facility.
The Bank had one long-term fixedmaintains two unsecured federal funds purchased lines of credit with banking partners which total $30 million. These lines bear interest at the lender banks announced daily federal funds rate, advance frommature daily, and are revocable at the discretion of the lending institution. There were no borrowings outstanding on these lines of credit as of March 31, 2023, or December 31, 2022. Additionally, we have a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.
See Note 7, “Federal Home Loan Bank and Federal Reserve Bank Advances and Other Borrowings” for more information.
At March 31, 2023, the Bank has pledged $1.02 billion of loans to secure the current FHLB with a contractual interest rateoutstanding advances and letters of 0.99%credit and to provide the unused borrowing capacity, compared to $0.98 billion of loans pledged at December 31, 2017. Advances from the FHLB have terms of 24 months or less, mature at various dates through 2018, and are secured by $316,155 of real estate and commercial and industrial loans. Each Federal Home Loan Bank advance is payable at the maturity date, with a prepayment penalty for fixed rate advances.2022.
On May 16, 2016, the Company entered into a Loan Agreement evidencing an $11,000 term loan maturing on May 15, 2021. The proceeds from the Loan were used by the Company for the sole purpose of financing the acquisition, by merger, of Community Bank of Northern Wisconsin.
On May 30, 2017, the Company extended a $5,000 term loan facility for the sole purpose of financing the acquisition, by merger, of Wells Financial Corporation. On August 17, 2017, this term loan was funded and matures on August 15, 2022 with a ten year amortization.
The variable rate senior notes provide for a floating interest rate that resets quarterly at rates that are indexed to the three-month London interbank offered rate ("LIBOR") plus 2.70%. The contractual interest rates for those notes ranged from 4.01% to 4.07% during the three months ended December 31, 2017, and from 3.44% to 4.01% during the year ended September 30, 2017. The weighted average contractual interest rates payable were 4.07% and 4.01% at December 31, 2017 and September 30, 2017, respectively.
On August 10, 2017, the Company entered into two subordinated note agreements in the amounts of $5,000 and $10,000, both maturing on August 9, 2027. The proceeds of the loans were used by the Company for the sole purpose of financing the acquisition, by merger, of Wells Financial Corporation.
The subordinated notes are unsecured and are subordinate to the claims of other creditors of the Company. The subordinated notes mature in August 2027, and convert to variable interest rate notes in August 2022. These notes provide for an annual fixed interest rate for the first five years of 6.75%. After the fixed interest period and through maturity, the interest rate will be reset quarterly to equal the three-month LIBOR rate, plus 4.90%. Interest on the Notes will be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year through the maturity date.
Stockholders’ Equity.Total stockholders’ equity was $74,454$164.6 million at March 31, 2023, compared to $167.1 million at December 31, 2017, compared2022. The decrease in stockholder’s equity was attributable to: 1) the $4.4 million cumulative effect adjustment from the adoption of ASU 2016-13; and 2) the payment of the annual cash dividend paid in February to $73,483 at September 30, 2017. Total stockholders’common stockholders of $0.29 per share or $3.0 million. These reductions to equity increased by $971 during the three months ended December 31, 2017, primarily as a result of an increase in retained earnings due towere partially offset by: 1) net income of $1,340, partially offset by$3.7 million; 2) a reduction in the unrealized lossesloss on AFSavailable for sale securities of $536.$1.1 million; and 3) the $0.1 million cumulative effect adjustment from the adoption of ASU 2023-02.
On July 23, 2021, the Board of Directors adopted a new share repurchase program. No shares were repurchased under this program in the first quarter of 2023. The Company is authorized to repurchase an additional 243 thousand shares under this July 2021 share repurchase program.
Liquidity and Asset / Liability Management.Liquidity management refers to our ability to ensure cash is available in a timely manner to meet loan demand, depositors’ needs, and meet other financial obligations as they become due without undue cost, risk, or disruption to normal operating activities. We manage and monitor our short-term and long-term liquidity positions and needs through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk. A key metric we monitor is our liquidity ratio, calculated as cash and securities portfolio divided by total assets. At March 31, 2023, our liquidity ratio increased to 13.7% percent from 13.0% at December 31, 2022. This was largely due to an increase in interest-bearing cash.
Consumer, commercial and government deposits have been stable since January 31, 2023 and since the two large coastal bank failures in early March. There are no material customer or industry concentrations. A decrease in deposits during January occurred as commercial customers decreased their cash balances to support the needs of their businesses. At March 31, 2023 our deposit portfolio composition was 55% consumer, 27% commercial, 14% public and 4% brokered deposits. At December 31, 2022 our deposit portfolio composition was 57% consumer, 28% commercial, 12% public and 3% brokered deposits.
Uninsured and uncollateralized deposits were $252.7 million, or 18% of total deposits, at March 31, 2023 and $298.8 million, or 21% of total deposits, at December 31, 2022. Uninsured deposits alone at March 31, 2023 were $413.5 million, or 29% of total deposits, and $441.2 million, or 31% of total deposits at December 31, 2022, with the difference being fully secured government deposits.
On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $517.4 million, or 205% of uninsured and uncollateralized deposits at March 31, 2023. At December 31, 2022 on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $570.0 million, or 191% of uninsured and uncollateralized deposits.
Our primary sources of funds are deposits;deposits, amortization, prepayments and maturities of outstanding loans; other short-term investments;on the investment and loan portfolios and funds provided from operations. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, and to fund loan commitments. 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 greatly influenced by general interest rates, economic conditions and competition. Although $143,575$171.1 million of our $288,554 (50.0%$274.8 million (62%) CD portfolio as of December 31, 2017 will mature within the next 12 months, we have historically retained a majority of our maturing CD’s. However, due to strategic pricing decisions regarding rate matching and branch closures, our retention rate decreased in 2022 and may decreaseremain at lower than historical levels in 2023 based on management’s current pricing strategy, which reflects the future.Bank’s current strong on-balance sheet liquidity ratio. 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 should also improve our cost of funds.
We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank, US Bank, Bankers’ Bank and First Tennessee Bank.our 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, commercial and industrial loans, and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets. As of December 31, 2017,Currently, we have approximately $185,236$213.4 million available to borrow under this arrangement, supported by loan collateral as compared to $193,913 at September 30, 2017.of March 31, 2023. We also maintain lineshad borrowing capacity of credit of $1,637 with$19.9 million at the Federal Reserve Bank $5,000and have been approved to access the Bank Term Funding Program (“BTFP”) if the need should arise. The bank maintains $30 million of uncommitted federal funds purchased lines with US Bank, $13,500 with Bankers’ Bank and $11,000 with First Tennessee Bankcorrespondent banks as part of our contingency funding plan.
In addition, the Company has a $5.0 million revolving line of credit which is available as needed for general liquidity purposes. While the Bank does not have formal brokered certificate lines of credit with counter parties at March 31, 2023, we believe that the Bank could access this market, which provides an additional potential source of liquidity as evidenced by third and fourth quarter 2022 and first quarter of 2023 new brokered deposits. See Note 7, “Federal Home Loan Bank and Other Borrowings” of “Notes to Consolidated Financial Statements” which are included in Part I, Item 1, “Financial Statements and Supplementary Data” of this Form 10-Q, for further detail.
In reviewing ourthe adequacy of our 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. SomeIn the ordinary course of ourbusiness, the Bank has entered into off-balance sheet financial instruments, have off-balance sheet risk.issued to meet customer financial needs. Such financial instruments are recorded in the financial statements when they become payable. 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 DecemberMarch 31, 2017,2023, the Company had $102,862approximately $234.8 million in unused loan commitments, compared to $79,794approximately $243.0 million in unused commitments as of September 30, 2017.December 31, 2022. In addition, there are $4.4 million of commitments for contributions of capital to an SBIC and an investment company at March 31, 2023. These commitments totaled $4.7 million at December 31, 2022.
Capital Resources. As of March 31, 2023, and December 31, 2017,2022, as shown in the table below, ourthe Bank’s Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions for both the Bank and at the Company level.provisions.
Below are the amounts and ratios for our capital levels as of the dates noted below for the Bank.Bank:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | For Capital Adequacy
Purposes | | To Be Well Capitalized
Under Prompt Corrective
Action Provisions |
| | Amount | | Ratio | | Amount | | | | Ratio | | Amount | | | | Ratio |
| As of March 31, 2023 (Unaudited) | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | $ | 226,873 | | | 14.6 | % | | $ | 124,595 | | | > = | | 8.0 | % | | $ | 155,744 | | | > = | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | 207,474 | | | 13.3 | % | | 93,446 | | | > = | | 6.0 | % | | 124,595 | | | > = | | 8.0 | % |
| Common equity tier 1 capital (to risk weighted assets) | 207,474 | | | 13.3 | % | | 70,085 | | | > = | | 4.5 | % | | 101,234 | | | > = | | 6.5 | % |
| Tier 1 leverage ratio (to adjusted total assets) | 207,474 | | | 11.7 | % | | 71,180 | | | > = | | 4.0 | % | | 88,974 | | | > = | | 5.0 | % |
| As of December 31, 2022 (Audited) | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | $ | 221,361 | | | 14.2 | % | | $ | 124,971 | | | > = | | 8.0 | % | | $ | 156,213 | | | > = | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | 203,422 | | | 13.0 | % | | 93,728 | | | > = | | 6.0 | % | | 124,971 | | | > = | | 8.0 | % |
| Common equity tier 1 capital (to risk weighted assets) | 203,422 | | | 13.0 | % | | 70,296 | | | > = | | 4.5 | % | | 101,539 | | | > = | | 6.5 | % |
| Tier 1 leverage ratio (to adjusted total assets) | 203,422 | | | 11.5 | % | | 70,610 | | | > = | | 4.0 | % | | 88,262 | | | > = | | 5.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
| | Amount | | Ratio | | Amount | | | | Ratio | | Amount | | | | Ratio |
| As of December 31, 2017 (Unaudited) | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | $ | 90,478,000 |
| | 13.3 | % | | $ | 54,289,000 |
| | >= | | 8.0 | % | | $ | 67,861,000 |
| | >= | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | 84,619,000 |
| | 12.5 | % | | 40,716,000 |
| | >= | | 6.0 | % | | 54,289,000 |
| | >= | | 8.0 | % |
| Common equity tier 1 capital (to risk weighted assets) | 84,619,000 |
| | 12.5 | % | | 30,537,000 |
| | >= | | 4.5 | % | | 44,110,000 |
| | >= | | 6.5 | % |
| Tier 1 leverage ratio (to adjusted total assets) | 84,619,000 |
| | 9.2 | % | | 36,601,000 |
| | >= | | 4.0 | % | | 45,751,000 |
| | >= | | 5.0 | % |
| As of September 30, 2017 (Audited) | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | $ | 88,511,000 |
| | 13.2 | % | | $ | 53,504,000 |
| | >= | | 8.0 | % | | $ | 66,880,000 |
| | >= | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | 82,569,000 |
| | 12.4 | % | | 40,128,000 |
| | >= | | 6.0 | % | | 53,504,000 |
| | >= | | 8.0 | % |
| Common equity tier 1 capital (to risk weighted assets) | 82,569,000 |
| | 12.4 | % | | 30,096,000 |
| | >= | | 4.5 | % | | 43,472,000 |
| | >= | | 6.5 | % |
| Tier 1 leverage ratio (to adjusted total assets) | 82,569,000 |
| | 9.2 | % | | 35,776,000 |
| | >= | | 4.0 | % | | 44,720,000 |
| | >= | | 5.0 | % |
At March 31, 2023, and December 31, 2017,2022, the Bank was categorized as "Well Capitalized"“Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.
Below are the amounts and ratios for our capital levels as of the dates noted below for the Company.Company: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | For Capital Adequacy
Purposes | | |
| | Amount | | Ratio | | Amount | | | | Ratio | | | | | | |
| As of March 31, 2023 (Unaudited) | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | $ | 220,131 | | | 14.1 | % | | $ | 124,595 | | | > = | | 8.0 | % | | | | | | |
| Tier 1 capital (to risk weighted assets) | 150,732 | | | 9.7 | % | | 93,446 | | | > = | | 6.0 | % | | | | | | |
| Common equity tier 1 capital (to risk weighted assets) | 150,732 | | | 9.7 | % | | 70,085 | | | > = | | 4.5 | % | | | | | | |
| Tier 1 leverage ratio (to adjusted total assets) | 150,732 | | | 8.5 | % | | 71,180 | | | > = | | 4.0 | % | | | | | | |
| As of December 31, 2022 (Audited) | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | $ | 218,737 | | | 14.0 | % | | $ | 124,971 | | | > = | | 8.0 | % | | | | | | |
| Tier 1 capital (to risk weighted assets) | 150,798 | | | 9.7 | % | | 93,728 | | | > = | | 6.0 | % | | | | | | |
| Common equity tier 1 capital (to risk weighted assets) | 150,798 | | | 9.7 | % | | 70,296 | | | > = | | 4.5 | % | | | | | | |
| Tier 1 leverage ratio (to adjusted total assets) | 150,798 | | | 8.5 | % | | 70,610 | | | > = | | 4.0 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | For Capital Adequacy Purposes | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
| | Amount | | Ratio | | Amount | | | | Ratio | | Amount | | | | Ratio |
| As of December 31, 2017 (Unaudited) | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | $ | 81,305,000 |
| | 12.0 | % | | $ | 54,289,000 |
| | >= | | 8.0 | % | | $ | 67,861,000 |
| | >= | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | 60,446,000 |
| | 8.9 | % | | 40,716,000 |
| | >= | | 6.0 | % | | 54,289,000 |
| | >= | | 8.0 | % |
| Common equity tier 1 capital (to risk weighted assets) | 60,446,000 |
| | 8.9 | % | | 30,537,000 |
| | >= | | 4.5 | % | | 44,110,000 |
| | >= | | 6.5 | % |
| Tier 1 leverage ratio (to adjusted total assets) | 60,446,000 |
| | 6.6 | % | | 36,601,000 |
| | >= | | 4.0 | % | | 45,751,000 |
| | >= | | 5.0 | % |
| As of September 30, 2017 (Audited) | | | | | | | | | | | | | | | |
| Total capital (to risk weighted assets) | $ | 79,889,000 |
| | 12.0 | % | | $ | 53,504,000 |
| | >= | | 8.0 | % | | $ | 66,880,000 |
| | >= | | 10.0 | % |
| Tier 1 capital (to risk weighted assets) | 58,947,000 |
| | 8.8 | % | | 40,128,000 |
| | >= | | 6.0 | % | | 53,504,000 |
| | >= | | 8.0 | % |
| Common equity tier 1 capital (to risk weighted assets) | 58,947,000 |
| | 8.8 | % | | 30,096,000 |
| | >= | | 4.5 | % | | 43,472,000 |
| | >= | | 6.5 | % |
| Tier 1 leverage ratio (to adjusted total assets) | 58,947,000 |
| | 6.6 | % | | 35,776,000 |
| | >= | | 4.0 | % | | 44,720,000 |
| | >= | | 5.0 | % |
At December 31, 2017, the Company was categorized as "Well Capitalized" under Prompt corrective Action Provisions.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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 partythird-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 bearinginterest-bearing liabilities. These policies are implemented by our Asset and Liability Management Committee (ALCO). The ALCO is comprised of members of the Bank'sBank’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.
In order to managemanaging our assets and liabilities andto 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 consumer, commercial, agricultural and agricultureconsumer loan maturities;
•originating variable rate commercial and agricultureagricultural loans;
•the sale of a vast majority of longer-term fixed-rate residential loans in the secondary market with retained servicing;
•managing our funding needs by utilizinggrowing core deposits, institutional certificatesdeposits;
•utilize brokered certificate of deposits and borrowings as appropriate, which may have fixed rates with varying maturities;
•purchasing investment securities to extend terms and lock in fixedmodify our interest rates;
reducing non-interest expense and managing our efficiency ratio by implementing technologies to enhance customer service and increase employee productivity;
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;
managing our exposure to changes in interest rates, including, but not limited to the sale of longer term fixed rate consumer loans;
with the acquisition of WFC, entering into selling loans on the secondary market with retained servicing; and
originating balloon mortgage loans with a term of seven years or less to minimize the impact of sudden rate changes.risk profile.
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 March 31, 2023 and December 31, 2017,2022 an analysis of our interest rate risk as measured by the estimated changes in Economic Value of Equity ("EVE"(“EVE”) resulting from an immediate and permanent shift in the yield curve (up 300 basis points and down 100 basis points). As of December 31, 2017, due to the current level of interest rates, EVE estimates for decreases in interest rates greater than 100 basis points are not meaningful.
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Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1) | Economic Value of Equity (EVE) | | EVE Ratio (EVE as a % of Assets) | | |
| | Amount | | Change | | % Change | | EVE Ratio | | Change | | |
| | (Dollars in thousands) | | | | | | |
| +300 bp | $ | 139,202 |
| | $ | (27,003 | ) | | (16 | )% | | 15.91 | % | | (158 | ) | | bp |
| +200 bp | 152,199 |
| | (14,006 | ) | | (8 | )% | | 16.87 | % | | (62 | ) | | |
| +100 bp | 162,518 |
| | (3,687 | ) | | (2 | )% | | 17.52 | % | | 3 |
| | |
| 0 bp | 166,205 |
| | — |
| | — |
| | 17.49 | % | | — |
| | |
| -100 bp | 157,345 |
| | (8,860 | ) | | (5 | )% | | 16.24 | % | | (125 | ) | | |
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(1) | Assumes an immediate and parallel shift in the yield curve at all maturities. |
The following table sets forth, at September 30, 2017, an analysis of our interest rate risk as measured by the estimated changes in EVE resulting from an immediate and permanent shift in the yield curve (up 300 basis points and down 100200 basis points).
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| | Percent Change in Economic Value of Equity (EVE) |
Change in Interest Rates in Basis Points (“bp”)
Rate Shock in Rates (1) | | At March 31, 2023 | | At December 31, 2022 |
| | | | | |
| +300 bp | | (2) | % | | 0 | % |
| +200 bp | | (2) | % | | 0 | % |
| +100 bp | | (1) | % | | 0 | % |
| -100 bp | | 1 | % | | (1) | % |
| -200 bp | | (1) | % | | (4) | % |
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Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1) | Economic Value of Equity (EVE) | | EVE Ratio (EVE as a % of Assets) | | |
| | Amount | | Change | | % Change | | EVE Ratio | | Change | | |
| | (Dollars in thousands) | | | | | | |
| +300 bp | $ | 131,737 |
| | $ | (28,971 | ) | | (18 | )% | | 15.16 | % | | (181 | ) | | bp |
| +200 bp | 145,141 |
| | (15,567 | ) | | (10 | )% | | 16.18 | % | | (79 | ) | | |
| +100 bp | 156,188 |
| | (4,520 | ) | | (3 | )% | | 16.91 | % | | (6 | ) | | |
| 0 bp | 160,708 |
| | — |
| | — |
| | 16.97 | % | | — |
| | |
| -100 bp | 152,204 |
| | (8,504 | ) | | (5 | )% | | 15.75 | % | | (122 | ) | | |
(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 100200 basis points). The table below presents our projected change in net interest income for the various rate shock levels at March 31, 2023, and December 31, 20172022.
| | | | | | | | | | | | | | |
| | Percent Change in Net Interest Income Over One Year Horizon |
Change in Interest Rates in Basis Points (“bp”)
Rate Shock in Rates (1) | | At March 31, 2023 | | At December 31, 2022 |
| | | | | |
| +300 bp | | (7) | % | | (3) | % |
| +200 bp | | (5) | % | | (2) | % |
| +100 bp | | (2) | % | | (1) | % |
| -100 bp | | 2 | % | | 1 | % |
| -200 bp | | 3 | % | | 2 | % |
(1)Assumes an immediate and September 30, 2017.parallel shift in the yield curve at all maturities.
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| | Change in Net Interest Income Over One Year Horizon |
| | At December 31, 2017 | | At September 30, 2017 |
Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1) | Dollar Change in Net Interest Income (in thousands) | | Percentage Change | | Dollar Change in Net Interest Income (in thousands) | | Percentage Change |
| | | | | | |
| +300 bp | $ | (2,942 | ) | | (9.14 | )% | | $ | (3,117 | ) | | (9.62 | )% |
| +200 bp | (1,581 | ) | | (4.91 | )% | | (1,858 | ) | | (5.74 | )% |
| +100 bp | (256 | ) | | (0.79 | )% | | (642 | ) | | (1.99 | )% |
| 0 bp | — |
| | | | — |
| | — | % |
| -100 bp | 237 |
| | 0.74 | % | | (327 | ) | | (1.02 | )% |
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(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.
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ITEM 4. | CONTROLS AND PROCEDURES |
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),1934, as amended (The "Exchange Act"(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 DecemberMarch 31, 2017,2023, 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 DecemberMarch 31, 20172023, 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 ActAct) 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.
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.
On March 22, 2017, Paul Parshall, a Wells stockholder, filed a putative Class Action Complaint in the District Court of Faribault County, Minnesota (“Court”) captioned Paul Parshall v. Wells Financial Corp., et al. and docketed at 22-CV-17-179.
The Complaint was subsequently amended on June 15, 2017. Named as Defendants were Wells, each of the current members of the Wells Board (“Individual Defendants”) and CCBI. The Amended Complaint asserts, inter alia, that the Individual Defendants breached their fiduciary duties. The Amended Complaint further asserts that Wells and CCBI aided and abetted the purported breaches of fiduciary duty. On September 27, 2017, the Court approved a Stipulation of Dismissal and entered its Order of Dismissal dismissing, with prejudice, the Litigation and all claims, demands or causes of action that were asserted, could have been asserted, or are held by the Plaintiff and without prejudice as to any absent members of the putative class. The Court retained jurisdiction to hear and rule upon an Application for Fees and Expenses that may be filed by Plaintiff’s counsel. Such Application, if any, must be filed by February 28, 2018.
A detailed discussion ofItem 1A.RISK FACTORS
The information in this Form 10-Q should be read in conjunction with the Company's risk factors is discloseddescribed in Part I,“Risk Factors” in Item 1A “Risk Factors,” of our 2022 10-K and the Company’sinformation under “Forward-Looking Statements” in this Form 10-K, for the fiscal year ended September 30, 2017. 10-Q and in our 2022 10-K.
There have been no material changes tofrom the risk factors as previously disclosed in “Risk Factors” in Item 1A of our Form 10-K. Please refer2022 10-K, except as described below:
Recent volatility in the banking sector may result in reputational risk, new legislation, regulations or policy changes that could subject the Company to that section for disclosuresincreased government regulation and supervision.
The recent failures of Silicon Valley Bank, Signature Bank, and First Republic Bank caused general uncertainty and concern regarding the risksbanking sector, including the adequacy of liquidity. Uncertainty may be compounded by the reach and uncertainties relatingdepth of media attention and its ability to our business. The following additional risk factorsdisseminate concerns about these types of events. This public uncertainty and concern could potentially affect the Bank despite its relatively high percentage of deposits (82% as of March 31, 2023) that are either insured or collateralized and its on balance sheet liquidity and collateralized borrowing capacity being well in excess of the uninsured deposit balances.
These recent bank failures also prompted responses by the FDIC, the Federal Reserve and the U.S. Treasure Secretary to protect the depositors of these institutions. Congress and the federal banking agencies have been added duebegun to evaluate the events leading to the implementationfailures and have put forth varying theories, such as inadequate regulation and supervision, and a failure by the institutions to effectively manage interest rate and liquidity risks. Continued evaluation of these recent developments, or the occurrence of new bank failures, may lead to governmental initiatives intended to prevent future bank failures. The federal banking agencies may also re-evaluate applicable liquidity risk management standards. Although we cannot predict with certainty which initiatives may be pursued by legislators and regulatory agencies, or the terms and scope of any such initiatives, any of the Tax Cutspotential changes referenced above could, among other things, subject us to additional costs, limit the types of financial services and Jobs Actproducts that the Bank may offer, and limit the future growth of 2017 (the "Tax Act") enacted in December 2017:
Changes in federal or state tax lawsthe Company, any of which could materially and adversely affect our financial condition and results of operations. Our financial condition andthe business, results of operations are impacted by tax policy implemented at the federal and state level. The Tax Act was enacted in December 2017. Among other things, the Tax Act reduces the corporate federal income tax rate for the Company from 34 percent to 24.5 percent for 2018, and 21 percent for 2019, which would result in changes in the valuation of deferred tax asset and liabilities. We revalued our net deferred tax assets to account for the future impactor financial condition of the lower corporate tax rates. Certain elements of the Tax Act are pending final regulations from the Internal Revenue Service and state taxing jurisdictions, and we cannot determine its full effects at this time. We also cannot predict whether any other tax legislation will be enacted in the future or whether any such changes to existing federal or state tax law would have a material adverse effect on our financial condition and results of operations. We continue to evaluate the impact the Tax Act and other potential tax reform proposals may have on our financial conduction and results of operations.Company.
Changes in federal or state tax laws could adversely affect our business, financial condition and results of operations. Our business, financial condition and results of operations are impacted by tax policy implemented at the federal and state level. The Tax Act was enacted in December 2017. Among other things, the Tax Act reduces the corporate federal income tax rate for the Company from 34 percent to 24.5 percent for 2018, and 21 percent for 2019, which would result in changes in the valuation of deferred tax asset and liabilities, and includes a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. We revalued our net deferred tax assets to account for the future impact of the lower corporate tax rates. The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could reduce our profitability and materially adversely affect our business, financial condition and results of operations.
Certain elements of the Tax Act are pending final regulations from the Internal Revenue Service and state taxing jurisdictions, and we cannot determine its full effects at this time. We also cannot predict whether any other tax legislation will be enacted in the future or whether any such changes to existing federal or state tax law would have a material adverse effect on our business, financial condition and results of operations. We continue to evaluate the impact the Tax Act and other potential tax reform proposals may have on our business, financial conduction and results of operations.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)Not applicable.
(b)Not applicable.
(c)Issuer Purchases of Equity Securities.
On July 23, 2021, the Board of Directors adopted a new share repurchase program. Under this new share repurchase program, the Company may repurchase up to approximately 5% of the outstanding shares of its common stock as of July 23, 2021, or 532,962 shares, from time to time. Under this new share repurchase program, no shares were repurchased during the quarter ended March 31, 2023. As of March 31, 2023, 243,805 shares remain available for repurchase under the current share repurchase authorization.
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Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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Item 3. | DEFAULTS UPON SENIOR SECURITIES |
Item 3.DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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Item 4. | MINE SAFETY DISCLOSURES |
Item 4.MINE SAFETY DISCLOSURES
Not applicable.
Item 5.OTHER INFORMATION
Not applicable.
Item 6.EXHIBITS
(a) Exhibits
(a) Exhibits
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| 101 | | The following materialsfinancial statements from Citizens Community Bancorp, Inc.’sthe Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended DecemberMarch 31, 20172023 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith:Inline XBRL: (i) Consolidated Balance Sheets;Sheets, (ii) Consolidated Statements of Operations;Operations, (iii) Consolidated Statements of Comprehensive Income, (Loss); (iv) Consolidated StatementStatements of Changes in Stockholders’ Equity;Equity, (v) Consolidated Statements of Cash Flows;Flows, and (vi) Condensed Notes to Consolidated Financial Statements.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) |
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| * | 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. |
SIGNATURES
In accordance withPursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | CITIZENS COMMUNITY BANCORP, INC. |
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Date: February 13, 2018May 4, 2023 | | By: | | /s/ Stephen M. Bianchi |
| | | | Stephen M. Bianchi |
| | | | Chief Executive Officer |
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Date: February 13, 2018May 4, 2023 | | By: | | /s/ James S. Broucek |
| | | | James S. Broucek |
| | | | Chief Financial Officer |